ECOM30001 Lecture Notes - Lecture 20: Thomas More, Random Effects Model, Invariant Factor
Document Summary
Long and wide: a relatively small number of cross-sectional units observed over relatively long period of time, small n, big t, big n, small t, big n, big t. A s s u m p t i o n s f o r p o o l e d o l s: required assumptions for pooled ols to be consistent, when conditions are satisfied: Standard errors computed using the usual ols formulas will be correct t-test and f-tests are valid. No correlation between errors corresponding to the same individual (last assumption) unrealistic. (cid:1841)[(cid:3036)(cid:3047), (cid:3037)(cid:3046)|]=(cid:882) (cid:1858)(cid:1867)(cid:1870) (cid:1861) (cid:1862) (cid:1867)(cid:1870) (cid:1872) (cid:1871) (cid:1841)[(cid:3036)(cid:3047),(cid:3036)(cid:3047)]=(cid:882) (cid:1858)(cid:1867)(cid:1870) (cid:1863)=(cid:883), (cid:884) . (cid:1863) Second equation: does not necessarily assume within individual error correlation in errors is constant over time, only assumes that it"s non-zero. Error variance can be different in different periods, yet constant across individuals. Panel cluster-robust standard errors are only really valid in large samples: there can be considerable finite sample bias.