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st: RE: Hausman Test when the RE OLS model includes time-constant variables


From   "Rodrigo Alfaro A." <ralfaro@bcentral.cl>
To   "Pavlos C. Symeou" <p.symeou@jbs.cam.ac.uk>
Subject   st: RE: Hausman Test when the RE OLS model includes time-constant variables
Date   Thu, 17 Apr 2008 15:06:14 -0400

Pavlos,

We are in the same page, but you are not considering that "maybe" your
x's have very small within variation, then they could be not significant
in the FE model but significant in the RE model. Anyway, not significant
variables is not bad because of that, it is bad for your research
question. I am thinking in a econometric way to fit the data instead of
doing data mining. In addition, I did not argue about your r2, which I
do not know the type that you are reporting here (within, overall,
between?). I suggested you to look on the importance of the variance of
the random component. Even more, you provided evidence that FE was
"accepted" against RE without these cross dummies. For these reasons, I
am still more favorable for FE than RE. It is a huge task convincing to
referees that random effects is appropiate because RE is not a robust
model in the set of specifications that you have. 

Anyway, what are the variables behind your model, maybe other members
could provide a standard procedure for your specific data, such
education, economics, etc.

Rodrigo.
 

-----Mensaje original-----
De: Pavlos C. Symeou [mailto:ps414@hermes.cam.ac.uk] En nombre de Pavlos
C. Symeou
Enviado el: Jueves, 17 de Abril de 2008 02:48 p.m.
Para: Rodrigo Alfaro A.
CC: statalist@hsphsun2.harvard.edu
Asunto: Re: Hausman Test when the RE OLS model includes time-constant
variables

Rodrigo,

Thanks for your reply. I understand that there might be correlation
between the random effect and x(i,t) using the RE. However, the RE model
on the one hand allows me to include the industry dummies (crucial for
the model's specification) and on the other hand most coefficients are
statistically significant and support my theoretical arguments. To the
contrary, in order to include the industry dummies in the FE model, I
need to create interactions and even if I do that, the model hardly
explains any relationship as all of my coefficients are statistically
insignificant. In addition, the RE reports much higher R-squares (around
0.3) than the FE (around 0.02). Is there a way that I can account for
this correlation whilst maintaining my existing (and only) variables in
the model?

Thanks,

Pavlos

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