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Agenda
Fixed effects
Random effects
Classical
Bayesian
0t
1t i
2t i 3t si it
R%it one period percentage return
%
0t expected return on a riskless security (stochastic)
% expected premium on the 'market' portfolio, R% R%
1t
Mt
0t
%
2t "nonlinear" risk effect
%
3t "nonbeta risk" term
Data are [R%, ,2 , s ], generated by auxiliary regressions
it
Parameter Heterogeneity
Unobserved Effects Random Constants
it ci it
yit x
it it
yit i x
i ui ,
E[ui | Xi ] 0 --> Random effects
E[ui | Xi ] 0 --> Fixed effects
EXE[ui | Xi ] 0.
Var[ui | Xi ] not yet defined - so far, constant.
Parameter Heterogeneity
Generalize to Random Parameters
it i it
yit x
i ui
E[ui | Xi ] zero or nonzero - to be defined
EX [E[ui | Xi ]] = 0
Var[ui | Xi ] to be defined, constant or variable
"The Pooling Problem: " What is the consequence
of estimating under the erroneous assumption of
constant parameters. (Theil, 1960, "The Aggregation
Problem") (Maddala, 1970s - 1990s, "The Pooling
Problem")
Fixed Effects
(Hildreth, Houck, Hsiao, Swamy)
it i it , each observation
yit x
yi X
i i i , Ti observations
i ui
Assume (temporarily) Ti > K.
E[ui | Xi ] =g(Xi ) (conditional mean)
P[ui | Xi ] =(Xi -E[X
(projection)
i ])
EX [E[ui | Xi ]] = EX[P[ui | Xi ]] =0
Var[ui | Xi ] constant but nonzero
yN 0
0
X2
...
0
...
...
...
...
0
1 1
0
2 2
N N
N
i1 i D i
i1 i D i
D
i
i
i i ]1D(yi -X
i [DD
i )
E.g., Individual specific time trends,
it it ; Detrend individual data, then OLS
yit i0 i1t x
E.g., Individual specific constant terms,
it it ; Individual group mean deviations, then OLS
yit i0 x
i
1 i
See :
Pesaran,H.,Smith,R.,Im,K.,"Estimating Long-Run Relationships
From Dynamic Heterogeneous Panels," J ournal of Econometrics, 1995.
(Repeated with further study in Matyas and Sevestre, The
Econometrics of Panel Data.
Smith, J ., notes, Applied Econometrics, Dynamic Panel Data Models,
University of Warwick.
http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/jennifersmith/panel/
Weinhold, D., "A Dynamic "Fixed Effects" Model for Heterogeneous
Panel Data," London School of Economics, 1999.
Var[wi | Xi ] XX
I
<==
Should
i
i
,i
,i vary by i?
Objects of estimation : , 2 ,i ,
Second level estimation : i
1
N
[X
NiX
]
[
X
1 i i
iw
1 i
i 2I )X][Ni1XiXi ]1
Var[b| X]=[Ni1XiXi ]1[Ni1Xi (XX
i
i i ]1
=2 [Ni1XiXi ]1 [Ni1XiXi ]1[Ni1 (XiX
( Xi )][NiX
i) X
1 X
the usual + the variation due to the random parameters
Robust estimator
iw
iXi ][Ni1XiXi ]1
Est.Var[b] [Ni1XiXi ]1[Ni1Xiw
yi X
w
,
Var[
w
|
X
]
=
=(
XX
i
i
i
i
i
i
i
,iI )
i1 i i
i
i1 i i
i
2
and
For FGLS, we need
,i.
X
(X i iX
) w i w
Xi=u i i +
i,
= ui (XiXi ) Xii
1
Var[bi| X
X i i)
i ]= +X (
2
,i
Ti
2
(y
x
b
)
2
it i
is unbiased
,i t1 it
Ti K
An Estimator for
E[bi| X
i]
2
1
Var[bi| X
]=
+
X
(
X
)
i
,i
i i
0+
EX [+2 ,i (XiXi )1 ]
+EX [2 ,i (Xi Xi )1]
1 N
Estimate Var[bi ] with i1(bi b)(bi b)'
N
1
2
1
Estimate EX [2 ,i ( XiXi )1] with Ni1
,i ( XiXi )
N
1 N
1 N 2
1
Estimating i
N
GLS
i1Wb
i i,OLS
N
2
1
1
2
1
[
X
(
)
]}
[
X
(
)
]
i
i1
,i
i i
,i
i i
i
i GLS + (I -Ai )bi,OLS bi,OLS Ai (GLS bi,OLS )
A
i {
-1
1 1 1
[X
2X
(
)
] }
,i
i i
-1
[Ai (I -Ai )]
]
Var[
GLS
WVar[bi,OLS ]i
Var[bi,OLS ]W i Ai
(
I
A
)
Var[bi,OLS ]
i
Estimated
xi ( XiMDi Xi )1 x i
Ti
Var[vi ] 2
A Hierarchical Model
Fixed Effects Model
it it
yit i x
Secondary Model
i ui <========
i z
Two approaches
(1) Reduced form is an REM with time constant zi
it z i ui it
yit x
(2) Two step
(a) FEM at step 1
i ui vi
(b) ai i (ai i ) z
1
xi (XiMDi Xi )1 x i
Ti
Var[ui vi ] u2 2
Fannie Mae
The Funding Advantage
The Pass Through
i, s, t individual, state,month
1,036,252 observations in 370 state,months.
RM mortgage
LTV= 3 dummy variables for loan to value
Small = dummy variable for small loan
Fees = dummy variable for whether fees paid up front
New = dummy variable for new home
MtgCo = dummy variable for mortgage company
J = dummy variable for whether this is a J UMBO loan
THIS IS THE COEFFICIENT OF INTEREST.
Variable
Mean
S.D.
Coeff
S.E.
RM
Rate %
7.23
0.79
Jumbo
0.06
0.23
0.16
0.05
LTV1
75%-80%
0.36
0.48
0.04
0.04
LTV2
81%-90%
0.15
0.35
0.17
0.05
LTV3
>90%
0.22
0.41
0.15
0.04
New
New
Home
0.17
0.38
0.05
0.04
Small
<
$100,000
0.27
0.44
0.14
0.04
Fees
Fees paid
0.62
0.52
0.06
0.03
MtgCo
Mtg. Co.
0.67
0.47
0.12
0.05
R2 = 0.77
Second Step
s,t 0
1 GSE Funding Advantages,t - estimated separately
2 Risk free cost of credits,t
3 Corporate debt spreadss,t - estimated 4 different ways
4 Prepayment spreads,t
5 Maturity mismatch risks,t
6 Aggregate Demands,t
7 Long term interest rates,t
8 Market Capacitys,t
9 Time trends,t
10-13 4 dummy variables for CA, NJ , MD, VAs,t
14-16 3 dummy variables for calendar quarterss,t
Estimates of 1
Second step based on 370 observations. Corrected for
"heteroscedasticity, autocorrelation, and monthly clustering."
Four estimates based on different estimates of corporate
credit spread:
0.07 (0.11) 0.31 (0.11) 0.17 (0.10) 0.10 (0.11)
Reconcile the 4 estimates with a minimum distance estimator
11-1)
(
2
1 -1)
(
1
2
3
4
-1
1-1),(
1 -1),(
1 -1),(
1 -1)]'
Minimize [(
3
(1 -1)
4
(
)
1 1
Estimated mortgage rate reduction: About 16 basis points. .16%.
0.31 (0.11)
.017 (0.10)
0.10 (0.11)
1
2
3
4
-1 (1 -1 )
)
1 1
4
(
1 -1)
2
.07
/
.11
OLS Results
OLS Starting values for random parameters model...
Ordinary
least squares regression ............
LHS=NEWHSAT Mean
=
6.69641
Standard deviation
=
2.26003
Number of observs.
=
6209
Model size
Parameters
=
4
Degrees of freedom
=
6205
Residuals
Sum of squares
=
29671.89461
Standard error of e =
2.18676
Fit
R-squared
=
.06424
Adjusted R-squared
=
.06378
Model test
F[ 3, 6205] (prob) =
142.0(.0000)
--------+--------------------------------------------------------|
Standard
Prob.
Mean
NEWHSAT| Coefficient
Error
z
z>|Z|
of X
--------+--------------------------------------------------------Constant|
7.02769***
.22099
31.80 .0000
AGE|
-.04882***
.00307
-15.90 .0000
44.3352
MARRIED|
.29664***
.07701
3.85 .0001
.84539
EDUC|
.14464***
.01331
10.87 .0000
10.9409
--------+---------------------------------------------------------
Individual Coefficients
Frequency
-.268
-.157
-.047
.064
.175
BETAEDUC
.285
.396
.507
HLM
yijk log of home sale price i, neighborhood j, community k.
m
yijk m1 m
x
jk ijk ijk (linear regression model)
M
xm
ijk sq.ft, #baths, lot size, central heat, AC, pool, good view,
age, distance to beach
Random coefficients
m
q q
m
q1 j Njk wjk
jk
Nqjk %population poor, race mix, avg age, avg. travel to work,
FBI crime index, school avg. CA achievement test score
qj sqm1 sEqm
vj
j
S
Eqm
air quality measure, visibility
j