On the robustness of the pooled CCE estimator

Artūras Juodis*, Hande Karabiyik, Joakim Westerlund

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

Among the existing estimators of factor-augmented regressions, the CCE approach is the most popular. A major reason for this popularity is the simplicity and good small-sample performance of the approach, making it very attractive from an empirical point of view. The main drawback is that most of the available asymptotic theory is based on quite restrictive assumptions, such as that the common factor component should be independent of the regressors. The present paper can be seen as a reaction to this. The purpose is to study the asymptotic properties of the pooled CCE estimator under more realistic conditions. In particular, the common factor component may be correlated with the regressors, and the true number of common factors, r, can be larger than the number of estimated factors, which in CCE is given by k+1, where k is the number of regressors. The main conclusion is that while the estimator is generally consistent, asymptotic normality can fail when r>k+1.

Original languageEnglish
Pages (from-to)325-348
Number of pages24
JournalJournal of Econometrics
Volume220
Issue number2
Early online date20 Jun 2020
DOIs
Publication statusPublished - Feb 2021

Funding

We would like to thank Vasilis Sarafidis (Guest Co-Editor), two anonymous referees and the participants of the 2017 International Panel Data Conference in Thessaloniki, the 2017 Bristol Econometric Study Group Meeting, the Bank of Lithuania, and the LMU (Munich) for helpful comments. Part of this paper was written while the first author enjoyed the hospitality of the Department of Economics at Lund University in Spring 2015 with the financial support of the C. Willems Stichting. The financial support via the NWO MaGW (number 404?10?457), The Netherlands and NWO VENI (number 451?17?002) grants is gratefully appreciated by the first author. The third author would like to thank the Knut and Alice Wallenberg Foundation for financial support through a Wallenberg Academy Fellowship, Sweden, and the Jan Wallander and Tom Hedelius Foundation, Sweden for financial support under research Grant Number P2014?0112:1.

FundersFunder number
Bank of Lithuania
Bristol Econometric Study Group Meeting
Guest Co-Editor
Vasilis Sarafidis
Jan Wallanders och Tom Hedelius Stiftelse samt Tore Browaldhs StiftelseP2014–0112:1
Nederlandse Organisatie voor Wetenschappelijk Onderzoek404–10–457, 451–17–002
Knut och Alice Wallenbergs Stiftelse
Liaoning Medical University

    Keywords

    • Common correlated effects
    • Factor-augmented regressions
    • Predetermined regressors
    • Rank condition

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