A SIMULATION STUDY OF FIXED-B ASYMPTOTIC DISTRIBUTIONS IN LINEAR PANEL MODELS WITH FIXED EFFECTS

Abstract

In linear models, panel data often violates the assumption that the error terms should be independent. As a result, the estimated variance is usually large and the standard inferential methods are not appropriate. The previous research developed an inference method to solve this problem using a variance estimator namely the Heteroskedasticity Autocorrelation Consistent of the Cross-Section Averages (HACSC), with some improvements. The test statistic of this method converges to the fixed-b asymptotic distribution. In this paper, the performance of the proposed inferential method is evaluated by means of simulation and compared with the standard method using plm package in R. Several comparisons regarding the Type I Error of these two methods have been carried out. The results showed that the statistical inference based on fixed-b asymptotic distribution out-perform the standard method, especially for the panel data with small number of individual and time dimension.

Keywords

• fixed-b asymptotic distribution
• fixed effect
• hac
• hacsc
• panel data