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Re: st: dynamic short panel

From   Giovanni Bruno <>
Subject   Re: st: dynamic short panel
Date   Wed, 28 Sep 2005 16:23:43 +0200

Roberto Zanola <>:

> Dear all,
> we need to estimate a dynamic short panel (T=6 and N=20). Two possibilities:
> (1) lsdvc

This is implemented in Stata by the user written code -xtlsdvc-. 
It behaves relatively better than IV-GMM estimators in small panel
data-sets, in terms of both bias and root mean squared error,
but needs strictly exogeneity of regressors and neither 
heteroskedasticity or serial correlation of disturbances.
> (2) ivreg2 with dummies

I'm not clear what estimator Roberto has in mind in this
case. -ivreg2- is a flexible routine that can implement many 
IV estimators and tests, and clearly not all of them are appropriate
methods for dynamic models. A simple N-consistent estimator for
dynamic panel data models that can be supported by -ivreg2- is that 
developed by Anderson and Hsiao (1982). It is carried out by taking 
variables in first-differences and using the dependent variable 
lagged two times, y(t-2), as an instrument for Dy(t-1). One can 
also deal with endogenous x's in this case, provided valid instruments 
are available. However, Monte Carlo evidence demonstrates that the AH 
estimator, although virtually unbiased, is rather imprecise in 
small samples (very large root mean squared error).

Anderson, T. W. and C. Hsiao. 1982. Formulation and Estimation 
of Dynamic Models Using Panel Data. Journal of Econometrics 
18: 570–606

Roberto may also find it useful my paper on small panel data-sets, 
downloadable from

(author of -xtlsdvc-) 

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Giovanni S.F. Bruno
Istituto di Economia Politica, Università Bocconi
Via U. Gobbi, 5, 20136 Milano
tel. + 02 5836 5411
fax. + 02 5836 5438
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