Scandinavian Working Papers in Economics

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

No 383: Maximum-likelihood based inference in the two-way random effects model with serially correlated time effects

Sune Karlsson () and Jimmy Skoglund ()
Additional contact information
Sune Karlsson: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Jimmy Skoglund: 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 considers maximum likelihood estimation and inference in the two-way random effects model with serial correlation. We derive a straightforward maximum likelihood estimator when the time-specific component follow an AR(1) or MA(1) process. The estimator is easily generalized to arbitrary stationary and strictly invertible ARMA processes. In addition we consider the model selection problem and derive tests of the null hypothesis of no serial correlation as well as tests for discriminating between the AR(1) and MA(1) specifications. A Monte-Carlo experiment evaluates the finite-sample properties of the estimators, test-statistics and model selection procedures.

Keywords: Panel data; autocorrelation; time specific effect; variance components

JEL-codes: C12; C13; C23; C51

31 pages, May 15, 2000

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hastef0383.readme.txt  Readme file for code
hastef0383.panel.zip  Gauss code for paper

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