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Re: st: fully modified OLS and dynamic OLS


From   Michael Hanson <mshanson@mac.com>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: fully modified OLS and dynamic OLS
Date   Thu, 19 Mar 2009 08:28:30 -0400

Bob:

Looks like we have similar suggestions and references in mind. I'm curious how to use -reg3- in this instance: would you specify lagged dependent variables as the instrument set? I'm trying to envision how to fit a simple income-consumption cointegrating relationship (e.g., the permanent income hypothesis, PIH), or maybe an application to purchasing power parity (PPP), into a 3SLS framework -- if you could provide more detail (or some example code), I suspect both Grant and I would benefit.

You are right to note Saikkonen (1991) as the main reference for dynamic OLS, but I suspect the technique of Stock and Watson (1993) -- who propose what might be called "dynamic GLS" -- is more commonly used. (Aside: is there a second (2003) edition of Maddala & Kim?)


Grant:

Bruce Hansen has Gauss and Matlab code to estimate cointegrating relationships by FM-OLS that likely could be adapted to Stata/Mata: see <http://www.ssc.wisc.edu/~bhansen/progs/jbes_92.html>. If you are interested in Peter Pedroni's panel FM-OLS estimator, your best bet still looks to be RATS: see <http://www.estima.com/procs/PANELFM.SRC>.

Hope this helps,
Mike


References (thereby denying Nick a datapoint suggesting economists don't provide proper citations):

Hansen, Bruce, "Tests for Parameter Instability in Regressions with I (1) Processes," Journal of Business and Economic Statistics, v.10 n. 3, 1992, pp. 321-335.

Maddala, G.S. and In-Moo Kim, "Unit Roots, Cointegration, and Structural Change," (1st edition?) Cambridge University Press, 1998. Pedroni, Peter, "Purchasing Power Parity Tests in Cointegrated Panels," Review of Economics and Statistics, v.83 n.4, 2001, pp. 727-731.

Pedroni, Peter, "Fully-Modified OLS for Heterogeneous Cointegrated Panels," Advances in Econometrics, v.15, 2000, pp. 93-130.

Saikkonen, Pentti, "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, v.7 n.1, 1991, pp. 1-21.

Stock, James and Mark Watson, "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, v.61 n.4, 1993, pp. 783-820.


On Mar 18, 2009, at 11:25 PM, Robert A Yaffee wrote:

  The fully modified OLS was developed by Phillips and Hansen in 1990.
Their option corrects for endogeneity and serial correlation. The Newey-West option is the closest thing to that but it does not necessarily correct for endogeneity in a multivariate system. Perhaps the 3sls in the reg3
command would give you a close approximation.


On Mar 18, 2009, at 11:36 PM, Robert A Yaffee wrote:

Grant,
As for the Dynamic OLS, if this is the method put forth by Saikkonen
in 1991,  this could be done with Stata easily.
As mentioned in GS Maddala and I.M. Kim's Unit Roots, Cointegration,
and Structural Change 2003,  Cambridge University Press, p. 163:
    the model regresses a y(1,t) on a y(2,t) and a d.y(2,t-j)
    would be formulated as a regression
of y(1,t) = B'y(2,t) + Sum (from j=-k1 to K2) b(j)d.y(2,t-j) + v (t) , where k1 and k2 are selected to increase at an appropriate rate up to T.
The method adds leads and lags to y(2,t) but not to y(1,t).
    You could estimate this with 3sls.
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