Assignment

Panel Bata Analysis

RanjanKumar07HS6013

PanelDataAnalysis
Introduction:
Panel data are also called longitudinal data or cross-sectional time series data. These are data
where multiple cases (people, firms, countries etc) are observed at two or more time periods.
An example is the National Longitudinal Survey of Youth, where a nationally representative
sample of young people is surveyed repeatedly over multiple years.
There are two kinds of information in cross-sectional time-series data: the cross-sectional
information reflected in the differences between subjects, and the time-series or within-
subject information reflected in the changes within subjects over time. Panel data regression
techniques allow taking advantage of these different types of information.
While it is possible to use ordinary multiple regression techniques on panel data, they may
not be optimal. The estimates of coefficients derived from regression may be subject to
omitted variable bias - a problem that arises when there is some unknown variable or
variables that cannot be controlled for that affect the dependent variable. With panel data, it is
possible to control for some types of omitted variables even without observing them, by
observing changes in the dependent variable over time. This controls for omitted variables
that differ between cases but are constant over time. It is also possible to use panel data to
control for omitted variables that vary over time but are constant between cases.
TypesofPanelAnalyticModel:
FixedEffectsEstimation:
Fixed effects regression is the model to use when we want to control for omitted variables
that differ between cases but are constant over time. It let us use the changes in the variables
over time to estimate the effects of the independent variables on the dependent variable, and
is the main technique used for analysis of panel data.
Consider a model with a single explanatory variable: for each i

t
= o

+ [
1
X
t
+ c
t

For each i, averaging this equation for time

= o

+ [
1
X

+ c

Where

= I
-1

t
1
t=1
and so on.
Subtracting both the equations, we get

t
-

= [ (X - X

t
) + c
t
- c
t
, t = 1,2,3,..........T
1 t
Or

t
= [
1
X

t
+ c
t
, t = 1,2,3,...............T
Where
it
= Y
it
-

is the Time-Demeaned data on Y, and similarly for X

t
and c
t
. By this
method we can remove the unobserved effect, o

. The fixed effect transformation is also

called within transformation. So, the fixed effects estimator is a pooled OLS(ordinary least
squares) estimator that is based on time-demeaned variables.
The original model is like

t
= [
1
X

t1
+ [
2
X

t2
+ + [
k
X

tk
+ c
t
, t = 1,2,3,........,T
RandomEffectsModel:
Some omitted variables may be constant over time but vary between cases, and others may be
fixed between cases but vary over time, then it can be included by using random effects. The
estimation is done via generalized least square (GLS). If we assume random effects as the
error term in the model

t
= [X
t
+ o

+ c
t

Where
t
is the dependent variable, X
t
is the vector of regressors, [ is the vector of
coefficients, o

is the random effects, c

t
is the error term. o

should have a normal

distribution with mean zero and a constant variance.
The coefficients can be estimated through
[
`
= (X

-1
X)
-1
(X

-1
)

-1
= I@
where X and Y are the matrix version of the regressor and independent variable respectively,
is the identity matrix, is the variance of unit and & is the variance-covariance matrix.
ErrorComponentModel:
The error component models are two-way random effects model. The error term should be
uncorrelated with the time series component and the cross-sectional error. The orthogonality
of the components allows the general error to be decomposed into cross-sectional specific,
temporal and individual error compon nt e s.
c
t
= :

+ c
t
+p
t

The component, v
i
, is the cross-section specific error. It affects only the observations in that
panel. Another, e
t
, is the time-specific component. This error component is peculiar to all
observations for that time period, t. The third
it
affects only the particular observation.
RandomParametersModel:
This model allows both random intercept and slope parameters that vary around common
means. The random parameters can be considered outcomes of a common mean plus an error
term, representing a mean deviation for each individual.
DynamicPanelDataModels:
There are two types of panel data models:
1. The serial correlation model
2. The state dependence model
In both cases
i
and u
it
are independent. In this model since the errors are not independent, we
have a problem of lagged dependent variable and correlated errors.
Conclusion:
Panel data analysis is an important method of longitudinal data analysis. It permits a
sophisticated family of regression analysis in both spatial and temporal dimensions. When the
data are from various sites and the time series or too short for separate time series analysis,
panel data analysis may provide the only way to longitudinally analyze the data.