Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 226: A Dynamic Conditionally Heteroscedastic Stochastic Frontier Model

Mickael Löthgren ()
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Mickael Löthgren: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: This paper presents a new dynamic ARCH-related conditionally heteroscedastic stochastic frontier model specification where firm and time-specific technical inefficiency is represented by an autoregressive stochastic process in the error components. Monte Carlo results reveal that a one-sided likelihood ratio test of the proposed model has correct small-sample size and has high power for small to medium sized panels. An empirical application is included using a panel of 23 OECD countries over the 26 year period 1965-1990. The estimation results indicate a clear rejection of the standard frontier model and existence of first order dynamic conditionally heteroscedastic technical inefficiency.

Keywords: Conditional Heteroscedasticity; Panel Data; Stochastic Frontier Model; Technical Inefficiency

JEL-codes: C22; C23; D24

19 pages, February 26, 1998

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