Binary Response Models for Heterogeneous Panel Data with Interactive Fixed Effects

67 Pages Posted: 7 Dec 2020 Last revised: 17 Nov 2021

See all articles by Jiti Gao

Jiti Gao

Monash University - Department of Econometrics & Business Statistics

Fei Liu

Nankai University - School of Finance

Bin Peng

Monash University - Department of Econometrics and Business Statistics

Yayi Yan

Department of Econometrics and Business Statistics, Monash University

Date Written: November 17, 2021

Abstract


In this paper, we investigate binary response models for heterogeneous panel data with interactive fixed effects by allowing both the cross-sectional dimension and the temporal dimension to diverge. From a practical point of view, the proposed framework can be applied to predict the probability of corporate failure, conduct credit rating analysis, etc. Theoretically and methodologically, we establish a link between a maximum likelihood estimation and a least squares approach, provide a simple information criterion to detect the number of factors, and achieve the asymptotic distributions accordingly. In addition, we conduct intensive simulations to examine the theoretical findings. In the empirical study, we focus on the sign prediction of stock returns, and then use the results of sign forecast to conduct portfolio analysis.

Keywords: Binary Response, Heterogeneous Panel, Interactive Fixed Effects, Portfolio Analysis

JEL Classification: C18, C23, G11

Suggested Citation

Gao, Jiti and Liu, Fei and Peng, Bin and Yan, Yayi, Binary Response Models for Heterogeneous Panel Data with Interactive Fixed Effects (November 17, 2021). Available at SSRN: https://ssrn.com/abstract=3743510 or http://dx.doi.org/10.2139/ssrn.3743510

Jiti Gao

Monash University - Department of Econometrics & Business Statistics ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia
61399031675 (Phone)
61399032007 (Fax)

HOME PAGE: http://www.jitigao.com

Fei Liu

Nankai University - School of Finance ( email )

94 Weijin Road
Tianjin, 300071
China

Bin Peng (Contact Author)

Monash University - Department of Econometrics and Business Statistics ( email )

900 Dandenong Road
Caulfield East, VIC 3145
Australia

Yayi Yan

Department of Econometrics and Business Statistics, Monash University ( email )

900 Dandenong Road
Caulfield, Victoria 3145
Australia
0498101110 (Phone)

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