TY - JOUR
T1 - On the role of the rank condition in CCE estimation of factor-augmented panel regressions
AU - Karabiyik, H.
AU - Reese, Simon
AU - Westerlund, Joakim
PY - 2017
Y1 - 2017
N2 - A popular approach to factor-augmented panel regressions is the common correlated effects (CCE) estimator of Pesaran (2006). This paper points to a problem with the CCE approach that appears in the empirically relevant case when the number of factors is strictly less than the number of observables used in their estimation. Specifically, the use of too many observables causes the second moment matrix of the estimated factors to become asymptotically singular, an issue that has not yet been appropriately accounted for. The purpose of the present paper is to fill this gap in the literature.
AB - A popular approach to factor-augmented panel regressions is the common correlated effects (CCE) estimator of Pesaran (2006). This paper points to a problem with the CCE approach that appears in the empirically relevant case when the number of factors is strictly less than the number of observables used in their estimation. Specifically, the use of too many observables causes the second moment matrix of the estimated factors to become asymptotically singular, an issue that has not yet been appropriately accounted for. The purpose of the present paper is to fill this gap in the literature.
KW - Factor-augmented panel regression
KW - CCE estimation
KW - Moore–Penrose inverse
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U2 - 10.1016/j.jeconom.2016.10.006
DO - 10.1016/j.jeconom.2016.10.006
M3 - Article
VL - 197
SP - 60
EP - 64
JO - Journal of Econometrics
JF - Journal of Econometrics
SN - 0304-4076
IS - 1
ER -