Transformed Maximum Likelihood Estimation of Short Dynamic Panel Data Models with Interactive Effects

42 Pages Posted: 29 May 2014

See all articles by Kazuhiko Hayakawa

Kazuhiko Hayakawa

Hiroshima University

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

L. Vanessa Smith

University of York - Department of Economics and Related Studies

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2014

Abstract

This paper proposes the transformed maximum likelihood estimator for short dynamic panel data models with interactive fixed effects, and provides an extension of Hsiao et al. (2002) that allows for a multifactor error structure. This is an important extension since it retains the advantages of the transformed likelihood approach, whilst at the same time allows for observed factors (fixed or random). Small sample results obtained from Monte Carlo simulations show that the transformed ML estimator performs well in Â…nite samples and outperforms the GMM estimators proposed in the literature in almost all cases considered.

Keywords: short T dynamic panels, transformed maximum likelihood, multi-factor error structure, interactive fixed effects

JEL Classification: C12, C13, C23

Suggested Citation

Hayakawa, Kazuhiko and Pesaran, M. Hashem and Smith, L. Vanessa, Transformed Maximum Likelihood Estimation of Short Dynamic Panel Data Models with Interactive Effects (May 16, 2014). CAFE Research Paper No. 14.06, Available at SSRN: https://ssrn.com/abstract=2442970

Kazuhiko Hayakawa

Hiroshima University ( email )

Japan

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

L. Vanessa Smith

University of York - Department of Economics and Related Studies ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

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