Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2014:8:
Estimation of Factor-Augmented Panel Regressions with Weakly Influential Factors

Joakim Westerlund () and Simon Reese ()

Abstract: The use of factor-augmented panel regressions has become very popular in recent years. Existing methods for such regressions require that the common factors are strong, such that their cumulative loadings rise proportionally to the number of cross-sectional units, which of course need not be the case in practice. Motivated by this, the current paper offers an indepth analysis of the effect of non-strong factors on two of the most popular estimators for factor-augmented regressions, namely, principal components (PC) and common correlated effects (CCE).

Keywords: Non-strong common factors; factor-augmented panel regressions; common factor models; (follow links to similar papers)

JEL-Codes: C12; C13; C33; (follow links to similar papers)

86 pages, February 13, 2014, Revised January 27, 2014

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This paper is published as:
Westerlund, Joakim and Simon Reese, (2017), 'Estimation of Factor-Augmented Panel Regressions with Weakly Influential Factors', Econometric Reviews, pages 1-65

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