Fulbright Economics Teaching Program

First Semester 2002

Analytical Methods
EViews and Panel Data
EViews POOL objects operate on variables that have special two-part names. he !irst part is
the name o! the variable" and the second part o! the name is the cross-section identi!ier that
indicates which cross-sectional #nit the variable belon$s to. %t is $ood practice &tho#$h not
necessar'( to be$in cross-section identi!iers with an #nderscore mar) to ma)e the !#ll variable
names more readable.
E*ample+ S#ppose we want to wor) with a panel data set on the ,S-" .anada" and /e*ico.
he variables that we want to #se are 0DP" Pop#lation" and rade Flows.
Variable 1ame First Part+
0DP
POP
2-
Variable 1ame Second Part &.ross-Section %denti!ier(
3,S-
3.-1
3/E4
Variables
0DP3,S- 0DP3.-1 0DP3/E4
POP3,S- POP3.-1 POP3/E4
2-3,S- 2-3.-1 2-3/E4
h#s" there are nine variables in o#r EViews wor)!ile. %t is eas' to see that panel data sets can
5#ic)l' become ver' lar$e. For e*ample" i! we have a panel o! 67 Vietnamese provinces !or
which we have ten-'ear time series on 8 variables related to a$ric#lt#re" then o#r wor)!ile has
&67 * 8( 9 :88 variables.
-!ter 'o# have named all o! 'o#r variables and have $ot the data into an EViews wor)!ile" 'o#
are read' to create the POOL object. ;o# do this b' clic)in$ the !ollowin$ se5#ence+
Objects / New Object / Pool
- window will open with space !or 'o# to list 'o#r cross-section identi!iers+
Eshra$h /otahar 7
%n the POOL object 'o# re!er to variables b' the !irst part name and the 5#estion mar). h#s" i!
we t'pe a command #sin$ 0DP< EViews #ses all three 0DP series !or the ,S-" .anada" and
/e*ico.
1otice the b#tton Pool0enr. Pool0enr is #sed to create new variables accordin$ to r#les that are
similar to the r#les !or ordinar' 0enr. For e*ample" i! we want to create 0DP Per .apita !or all
three co#ntries in o#r POOL" we wo#ld clic) Pool0enr and then t'pe the e5#ation+
0DPP.< 9 0DP< = POP<
For estimation" EViews has one
window in which the #ser speci!ies
the e5#ation and the ass#mptions
re$ardin$ the stochastic
dist#rbance term. hat window is
shown here.
>e will describe each element o!
the speci!ication window.
Dependent ariable
he dependent variable will be
t'ped in accordin$ to its name and
5#estion mar). For e*ample" 'o#
mi$ht #se 0DPP.<
Eshra$h /otahar 2
!ample
?' de!a#lt" EViews will #se the lar$est sample possible in each cross-section. -n observation
will be e*cl#ded i! an' o! the e*planator' or dependent variables for that cross-section are
#navailable in that period.
%! the bo* !or Balanced Sample is chec)ed" EViews will eliminate an observation i! data are
#navailable for any cross-section in that period.
"ommon "oe##icients
%n this !ield 'o# list all e*planator' variables that 'o# ass#me have the same slope coe!!icient !or
ever' cross-sectional #nit. ,se the !ormat V-2< ;o# ma' #se -2&p( speci!ications i! 'o# want
to model a#tocorrelation. @eep in mind that 'o#r panel data set sho#ld have a rather lon$ time
series dimension in order to $et reliable estimators o! the a#tocorrelation coe!!icients.
"ross$!ection !peci#ic "oe##icients
%n this window 'o# t'pe the names o! all e*planator' variables that 'o# ass#me have di!!erent
slope coe!!icient val#es !or di!!erent cross-sectional #nits. ,se the !ormat V-2<
%ntercept
Aere 'o# speci!' whether 'o#r model has
1o intercept ... this case is rare.
.ommon intercept ... this case is #n#s#al.
Fi*ed E!!ects ... the t'pical speci!ication.
7
2andom E!!ects ... this speci!ication is not o!ten #sed beca#se it re5#ires stron$
ass#mptions that are di!!ic#lt to meet in practice.
&eighting
Aere" wei$htin$ re!ers to B!easible wei$hted least s5#ares.B
1o wei$htin$ ... no e5#ation-speci!ic heteroscedasticit'.
.ross-section wei$hts ... !easible >LS to correct !or e5#ation-speci!ic heteroscedasticit'.
S,2 ... acco#nts !or contemporaneo#s cross-e5#ation correlation o! errors
and e5#ation-speci!ic heteroscedasticit'. o #se this" the time-
series dimension m#st e*ceed the cross-section dimension & C 1(.
7
%! 'o# chec) this option 'o# will see that the EViews o#tp#t does not report standard errors" t-stats" or p-val#es !or
the estimates o! the !i*ed e!!ects. %! 'o# are interested in these &especiall' !or cond#ctin$ >ald test on these
coe!!icients(" 'o# can enter C in the Cross section specific coefficients edit !ield" and estimate a
model witho#t a constantD that is" in the Intercept !ield chec) None.
Eshra$h /otahar E
%terate to .onver$ence ... ca#ses the pro$ram to comp#te new resid#als based on the !easible
0LS coe!!icient estimators" then #pdate the !easible 0LS
coe!!icient estimatorsD comp#te new resid#als based on the new
0LS coe!!icient estimators" then #pdate the !easible 0LS
coe!!icient estimators" etc ....
Options
here is onl' one option+ >hites A../ can be prod#ced i! 'o# do not choose S,2.
'ypothesis Testing
%n panel data models &as in sin$le-e5#ation m#ltiple-re$ression models( we are interested in
testin$ two t'pes o! h'potheses+ h'potheses abo#t the variances and covariances o! the
stochastic error terms and h'potheses abo#t the re$ression coe!!icients. he $eneral to simple
proced#re provides a $ood $#ide.
?e!ore testin$ h'potheses abo#t the re$ression coe!!icients" it is important to have a $ood
speci!ication o! the error covariance matri* so that the test statistics !or the re$ression
coe!!icients are reliable.
Testing 'ypotheses About The Error "o(ariance Matri)
%t is help!#l to thin) abo#t restricted and unrestricted error covariance matrices.
-n error covariance matri* is a s5#are matri* with the error variances o! the individ#al cross-
sectional e5#ations alon$ the dia$onal and with the contemporaneo#s error covariances on the
o!!-dia$onal elements. -ll covariance matrices are s'mmetric" so i! we speci!' an error
covariance matri* !or a panel model with !ive cross-sectional #nits we have a &F * F( matri* with
!ive dia$onal #nits and ten o!!-dia$onal #nits+
2
7 72 7E 7: 7F
2
2 2E 2: 2F
2
E E: EF
2
: :F
2
F

%! we clic) the b#tton !or S,2" EViews will estimate all o! these parameters. On the other hand"
i! we believe that the cross-sectional #nits do not have an' contemporaneo#s cross-e5#ation error
covariances" we wo#ld clic) the b#tton !or .ross-Section >ei$htin$ and EViews wo#ld impose
Gero restrictions on all o! the o!!-dia$onal elements o! the matri*. Onl' the dia$onal elements
wo#ld be estimated+
Eshra$h /otahar :
2
7
2
2
2
E
2
:
2
F
0 0 0 0
0 0 0
0 0
0

he second model involves imposin$ ten restrictions" compared to the !irst model.
Finall'" i! we ass#med that o#r stochastic dist#rbances were !ree o! cross-sectional
heteroscedasticit'" we clic) the 1o >ei$htin$ b#tton and EViews wo#ld estimate onl' one
dia$onal element instead o! !ive+ !o#r restrictions wo#ld be imposed" compared to the second
model.
2
2
2
2
2
0 0 0 0
0 0 0
0 0
0

estin$ these restrictions is easil' accomplished b' means o! a test called a likelihood ratio test.
EViews o#tp#t reports a statistic called the Log-Likelihood. his is an estimator o! the joint
probabilit' o! the observed sample" $iven the point estimates o! the parameters. -s s#ch" it is a
n#mber bo#nded b' Gero and one.
-ll o! o#r estimation methods aim to ma*imiGe this lo$-li)elihood. %n man' applications"
ma*imiGin$ the lo$-li)elihood leads to e*actl' the same estimator as the Least-S5#ares method
does" b#t the anal'tical wor) re5#ired is heavier" so we !ollow the Least-S5#ares approach.
O#r interest here is in the e*tent to which imposin$ restrictions on the error covariance matri*
red#ces the lo$-li)elihood statistic.
%! we !orm a ratio o! the li)elihood o! a restricted model
H
R
L divided b' the li)elihood o! an
#nrestricted model
H
U
L " we e*pect the ratio to be less than 7 beca#se the ma*im#m li)elihood
s#bject to a restriction can be no $reater than the ma*im#m li)elihood o! the #nrestricted model.
De!ine the li)elihood ratio+
H

H
R
U
L
L
= l
. hen 0 7 l
%! the restricted model is not si$ni!icantl' di!!erent !rom the #nrestricted model we e*pect the
li)elihood ratio to be close to 7. he distrib#tion theor' o! the li)elihood ratio is a bit
c#mbersome. Aowever" it is well )nown that the distrib#tion o!
2 lo$& ( l
is as'mptoticall'
.hi-S5#are" so that in an' application with a s#!!icientl' lar$e sample siGe we can #se+
Eshra$h /otahar F
( ) ( ) ( )
2
5
H H
2 lo$& ( 2 lo$ lo$ appro* I
R U
L L = l
where 5 is the n#mber o!
restrictions.
,nder the n#ll h'pothesis we e*pect
2 lo$& ( l
to be close to GeroD we reject the n#ll
h'pothesis i! the realiGed val#e o! the li)elihood ratio statistic e*ceeds an appropriate critical
val#e or i! the p-val#e o! the test is smaller than the pre-selected si$ni!icance level.
Maintained Model
>hile testin$ h'potheses abo#t restrictions on the error covariance matri*" some speci!ication o!
the panel data re$ression model m#st be maintained. %t is recommended that the maintained
model be B$eneralB in the sense that we #sed that term in describin$ the B$eneral-to-simpleB
modelin$ strate$'.
Testing *estrictions on the Panel Data Model
-!ter a so#nd speci!ication !or the error covariance str#ct#re has been established" tests
associated with the $eneral to simple modelin$ strate$' ma' be #nderta)en. hese tests ma' be
the #s#al >ald tests or t-tests on individ#al coe!!icients.
@eep in mind that when the cross-section wei$hts or S,2 methods or an' -2&p( speci!ication is
#sed" the res#lts all as'mptoticall' based so that the t-stats are appro*imatel' standard normal
and the >ald F-stats are appro*imatel' .hi-S5#ared.
+nrestricted Model
he completel' #nrestricted model is this one+
7 7 2 2

it i i i t i i t iK K i t it
Y X X X = + + + + + L
%n this model" the intercepts and the partial re$ression coe!!icients var' across cross-sectional
#nits. %! either the no-wei$htin$ or cross-sectional wei$hts option is chosen !or the error
covariance str#ct#re" then the res#lts will be e*actl' the same as appl'in$ OLS to the data !or
each cross sectional #nit.
%! the S,2 option is chosen" then e!!icienc' will be enhanced b' e*ploitin$ the in!ormation
contained in the cross-e5#ation error covariances. 2emember that & C 1 ( is re5#ired to #se
this option.
Partially *estricted Model
%n man' panel data sets the time-series dimension is 5#ite short so it is impractical to estimate
the model !or which all parameters var' across cross-sectional #nits. %n this case the most
Eshra$h /otahar 6
$eneral !easible model is the !i*ed-e!!ects model+ onl' the intercepts var' across cross-sectional
#nitsD the partial re$ression coe!!icients are the same !or all cross-sectional #nits.
O! co#rse" there are models in which some partial re$ression coe!!icients are identical across
cross-sectional #nits while others var'.
*estricted Model
he most restrictive model is the one in which the intercepts and the partial re$ression
coe!!icients are identical !or all cross-sectional #nits.
estin$ model restrictions ma' be done via the >ald .oe!!icient test or via the li)elihood ratio
test. he two methods are as'mptoticall' e5#ivalent" tho#$h the' ma' $ive di!!erent res#lts !or a
partic#lar !inite sample.
-s 'o# move thro#$h the $eneral-to-simple modelin$ strate$' it is sensible to re-chec) the error
covariance str#ct#re as 'o# impose restrictions on the modelJs partial re$ression coe!!icients and
intercepts. Even tho#$h 'o# ma' !ail to reject the h'potheses that represent restrictions that 'o#
impose" the h'potheses ma' not be perfectly tr#e" and that ma' a!!ect the estimators and tests o!
the error covariances.
[Written by Eshragh Motahar based on notes by M. D. Westbrook, and the EViews manual.]
Eshra$h /otahar K