st: Re: Two way Fixed Effects & Autocorrelation& Heteroskedasticity

["Rodrigo Alfaro" <ralfaro76@hotmail.com>]

Dear Max

I have some comments about your question:

(1) If you think that the error term has autocorrelation and 
heteroskedasticity I am not sure if Hausman test is still valid. My personal 
approach to this problem is not to use Hausman test and try to solve the 
possible correlation between unobservable and explanatory variables. Random 
Effects assumes that there is not correlation.

(2) Suppose that you decided to use Fixed Effects (FE), the fact of the 
error term has autocorrelation could be the result of misspecification in 
your model. In other word, maybe you model need a lag dependent variable in 
the right hand side. In that case FE is biased and you have to choose 
between try to correct the bias (Hahn-Kuersteiner, econometrica 2001 or 
Kiviet, journal of econometrics 1995)... here 
http://ideas.repec.org/c/boc/bocode/s450101.html you can find the work of 
Bruno based on Kiviet paper or use a Instrumental Variable approach 
(Anderson-Chiao, econometrica 1980? or Arellano-Bond, review of economic 
studies 1991) commands -ivreg- and -xtabond-.

(3) Finally, maybe you know that there is not lag dependent variable in your 
model but you still have errors with autocorrelation and heteroskedasticity. 
Well, the command -xtregar- solves the problem for the case of 
autocorrelation of order 1 in your model, but this solution is Prais or 
Cochrane solution for time series, which means that you estimate the model 
as you have the lag dependen variable in the right hand side, plus the lags 
of the exogenous variables in the context of a nonlinear constrained model. 
Details are available in autocorrelaton chapter of any textbook. In 
conclusion, you will have the lag dependent variable...

(4) A way to solve the problem without a lag dependent variable is using a 
standard error correction that takes care of the behavior of the error term 
but does not change the Least Square estimation of the parameters. You can 
use -newey- with manually fixed effect, but you have adjust the degree of 
freedom (I wrote a command for that I can send you if you are interesting).

Rodrigo.


----- Original Message ----- 
From: <kosak@gmx.de>
To: <statalist@hsphsun2.harvard.edu>
Sent: Thursday, March 30, 2006 11:11 AM
Subject: st: Two way Fixed Effects & Autocorrelation& Heteroskedasticity



> My problem was already discussed before,but i didn`t found an appropriate
> solution to it.-
> I have a big panel data set (1500 observations over 20 years).I want to
> estimate a model with time and group specific fixed effects (Hausman Test
> performed). The Model suffers from autocorrelation and
> heteroskedasticity.The problem is that the cluster option is not possible
> for xtregar. Can i use xtgls or areg?As i understood xtgls estimates a
> random effet model.
> Any suggestions?
> Max
>
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