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From |
itchiftc@rumms.uni-mannheim.de |

To |
statalist@hsphsun2.harvard.edu |

Subject |
Re: st: AW: Why is the adj. R-squared lower with time FE than with time & firm FE? |

Date |
Tue, 29 Sep 2009 16:00:48 +0200 |

Hello Martin,

Thanks in advance! Ida Zitat von Martin Weiss <martin.weiss1@gmx.de>:

<> " Thus, intuitively, as there are more variables in the Eq.1, I thought that the adjusted R-squared should be higher than in Eq.2." It all depends on whether you are talking about the adjusted R2 or not. Note in the example that R2 does indeed increase, even when a meaningless covariate is added, and that the adjusted R2 penalizes you for an additional covariate, with the penalty exceeding the increase in the unadjusted R2... *** clear* set obs 10000 set seed 123456 gen x=rnormal() gen eps=rnormal() gen noise = rnormal(0,10) gen y =1+5*x+eps qui reg y x di in red e(r2) " " e(r2_a) qui reg y x noise di in red e(r2) " " e(r2_a) *** HTH Martin -----Ursprüngliche Nachricht----- Von: owner-statalist@hsphsun2.harvard.edu [mailto:owner-statalist@hsphsun2.harvard.edu] Im Auftrag von itchiftc@rumms.uni-mannheim.de Gesendet: Dienstag, 29. September 2009 14:28 An: statalist@hsphsun2.harvard.edu Betreff: st: Why is the adj. R-squared lower with time FE than with time & firm FE? Dear Statlist, i know that this is rather an econometrical question, but may be still someone could help me... I'm estimating panel regressions (in Stata 10) and have two equations which are exactly the same, except for the included fixed effects: Equation #1 includes both company and time fixed effects: -xtreg y x1 x2 x3 timedummy2-timedummy9, fe cluster(firmid) whereas Equation #2 has only time fixed effects: -reg y x1 x2 x3 timedummy2-timedummy9, cluster(firmid). Looking at the adjusted R-Squared I was surprised to see that it is lower in Eq.1 than in Eq.2. As explained in econometric books (e.g. Stock and Watson 2007) icorporating fixed effects is simmilar to including dummies for each individual (in my case 80 firms). Thus, intuitively, as there are more variables in the Eq.1, I thought that the adjusted R-squared should be higher than in Eq.2. I found a thread with very comprehensive explanation on panel data R-squared: http://www.stata.com/statalist/archive/2006-03/msg00180.html stating in the end that "In the -xtreg, fe- calculation, we are washing out the explanatory effects of the intercepts." Is this the explanation for the lower adj. R-squared in Eq.1? I'm not quite sure and would appreciate any comment! Thanks, Ida * * For searches and help try: * http://www.stata.com/help.cgi?search * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/ * * For searches and help try: * http://www.stata.com/help.cgi?search * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/

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**References**:**st: Why is the adj. R-squared lower with time FE than with time & firm FE?***From:*itchiftc@rumms.uni-mannheim.de

**st: AW: Why is the adj. R-squared lower with time FE than with time & firm FE?***From:*"Martin Weiss" <martin.weiss1@gmx.de>

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