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Re: st: Multicollinearity in fixed effects regressions

From   Bin Dong <>
Subject   Re: st: Multicollinearity in fixed effects regressions
Date   Wed, 14 Jul 2010 19:37:21 +1000

Dear Maarten,

Thank you very much for your helpful reply. However, I have checked my
data again and again. I am sure that the individual dummies are
correctly created, and all time-invariant variables are really
constant (actually in -xtreg-, all are dropped). Furthermore, as you
know, the introduction of individual dummies is believed to be an
effective approach to estimate the FE model. That is why I was
confused by my results and hope to find a reason to explain them.


2010/7/14 Maarten buis <>:
> --- On Wed, 14/7/10, Bin Dong wrote:
>> when I estiamte the FE model by including individual
>> dummies. Some of independent variables in my fixed
>> effects regressions are time-invariant and therefore
>> theoretically have perfect multicollinearity with
>> individual dummies. However, I always get significant
>> coefficients of these variables in my fixed effects
>> regressions with different controls. Are the results
>> reliable because my sample size is large (1600 obs)
>> enough to provide adequate information?
> No, if you added dummies for each individual in your
> data then the effects of all variables that are
> constant within that individual are unidentified,
> regardless of how large your dataset is. This thus
> means that there is a problem with your data: either
> the individual dummies aren't correctly created or
> the variables that are supposed to be constant within
> the individual aren't constant.
> Also note that if you are doing anything other than a
> linear regression (-regress-) you should be worried
> that your model is not a fixed effects regression,
> see for example:
> <>
> If you are doing a this model in a linear regression
> context, you should be using -xtreg-. This at least
> rules out that something went wrong witht he creation
> of the dummies (your variable identifying each
> individual may still be wrong though).
> Hope this helps,
> Maarten
> --------------------------
> Maarten L. Buis
> Institut fuer Soziologie
> Universitaet Tuebingen
> Wilhelmstrasse 36
> 72074 Tuebingen
> Germany
> --------------------------
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Bin Dong | Doctoral Student
School of Economics and Finance | Queensland University of Technology
Phone: +61 7 3138 6659 | Email: | Location:
Z857-06(Gardens Point)

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