MODELS FOR PANEL DATA:

POOLED REGRESSION MODEL

NACEUR KHRAIEF
TUNIS BUSINESS SCHOOL - 2024
 Pooled Regression

 We begin the analysis by assuming the simplest version of the model, i.e., there is no
heterogeneity among the groups, the pooled model

and
 In this form, if the remaining assumptions of the classical model are met (zero
conditional mean of , homoscedasticity, uncorrelatedness across observations and
strict exogeneity of ), then OLS is the efficient estimator,
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 Stack the T observations for individual i in a single equation

 Where and now includes the constant term.

Or
 Where
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 If it is assumed that is well behaved

if
 Then the most efficient estimator of is

 With estimated variance in which

 Where
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 ROBUST COVARIANCE MATRIX ESTIMATION AND BOOTSTRAPPING

 However, It is quite likely that there is correlation across observations such that , then
we can estimate the appropriate asymptotic covariance matrix as follows
 Pooled Regression

 ROBUST COVARIANCE MATRIX ESTIMATION AND BOOTSTRAPPING

 In this setting, there may be heteroscedasticity across individuals. Suppose, then, we

assume that the disturbance vector consists of plus these omitted components. Then,

 The ordinary least squares estimator of is

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The true asymptotic covariance matrix would take the form

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We can estimate this matrix

Where is the vector of T residual for individual i.

Bootstrapping offers another approach to estimating an appropriate covariance matrix
for the estimator.
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 ROBUST ESTIMATION USING GROUP MEANS

The pooled regression model can also be estimated using the sample means of the data.
The implied regression model is obtained by pre-multiplying each group by where is
row vector of ones

or

and with unspecified.

 Pooled Regression

 This is a heteroscedastic regression for which we would use the White estimator for
appropriate inference.
 White estimator : We use OLS (inefficient) but consistent estimators, and calculate an
alternative (“robust” or “consistent) standard error that allows for the possibility of
heteroskedasticity.

 Then: with
 The square root of the previous formulae is the heteroscedasticity-robust standard
error.
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 ESTIMATION WITH FIRST DIFFERENCES

 First differencing is another approach to estimation.
 The intent would explicitly be to transform latent heterogeneity out of the model.

 which implies the first differences equation

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 ESTIMATION WITH FIRST DIFFERENCES

 Advantage: it removes the latent heterogeneity from the model whether the fixed or
random effects model is appropriate.
 Disadvantage: the differencing also removes any time-invariant variables from the
model. Of course, this is not helpful for the application in the example like the impact
of Education on the Wage because it is the primary object of the analysis.
 Technical problems:
1. Trade-off between the cross-observation correlation and moving average (MA)
disturbance
2. The new disturbance is autocorrelated, then it is conceivable and could be
correlated (the two-step feasible GLS for an MA disturbance).
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 THE WITHIN- AND BETWEEN-GROUPS ESTIMATORS

 We could formulate a pooled regression model in three ways.
(a). First, the original formulation is

(b). In term of deviations from the group means

,

(c). and in terms of the group means

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 To estimate by pooled OLS, we would use the total sum of squares and cross products

Where
and
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 In (b), the moments matrices we use are within-group’s (i.e., deviations from the
group means) sums of squares and cross products,

 Finally, for c, the means of group mean are the overall mean (i.e., ). Therefore the
moment matrices are the between-groups sums of squares and cross products
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It is easy to verify that

And
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 Therefore, there are three possible least squares estimator of β corresponding to

theses decompositions.
 (a). The least squares estimator in the pooling regression is

 (b). The within-groups estimator from is

This is the least squares dummy variable (LSDV) estimator.

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 (c). An alternative estimator would be the between-groups estimator

This is the least squares estimator based on the N sets of group means.