Panel Data Analysis

Panel Data Analysis

(Fixed Effect Model/ Random Effect Model/ Mixed Effect Model)
• In statistics a fixed effects model is a statistical model in which the
model parameters are fixed or non-random quantities.
• This is in contrast to random effects models and mixed models  in which
all or some of the model parameters are considered as random variables.
• In many applications a fixed effects model refers to a regression model in
which the group means are fixed (non-random) as opposed to a random
effects model in which the group means are a random sample from a
population.
• Generally, data can be grouped according to several observed factors.
The group means could be modeled as fixed or random effects for each
grouping.
• In a fixed effects model each group mean is a group-specific fixed
quantity.
 Vector AutoRegression (VAR)

05 3
 Auto Regressive Model
• AR means that the value of variable X at time t
is decided by the values of previous Xs. The
relationship could be noted as: Xt = a + b1Xt-1
+ b2Xt-2 ...... +bqXt-q + u, where 'a' is constant
and 'u' is white noise.
 VAR
• Vector auto regression (VAR) is a stochastic
process model used to capture the linear
interdependencies among multiple time series. 
• VAR models generalize the
univariate autoregressive model (AR model) by
allowing for more than one evolving variable.
 VAR Model
• VAR(p) is a multivariate generalization of AR(p)
model.
• Used to capture the interdependence among
multiple time series.

6
 Formulation of the Standard VAR

x t  10   x t 1   y t 1........... x t 1   y t 1  1t

1
11
1
12
p
11
p
12

y t  10   x t 1   y t 1........... x t 1   y t 1  1t

1
21
1
22
p
21
p
22

 x t   10   111  1
 x t 1   11
p
12   x t  p    1t 
p

 y       1  ...... p  
12
  p  
 t   20  21    y t 1  21 22   y t  p   2t 
1
22

y a A y0 1
............... Ap y  t
t t 1 t p
7
 VAR
• VAR is a generalized form of AR. Simply speaking, the Xt in the
equation above is not a single variable but a vector of variables.
• For example, Xt could be [X1,t, X2,t, X3,t], where X1,t
represents GDP at time t, X2,t CPI at time t, X3,t population at
time t. Similarly, Xt-1, Xt-2 ...... represents the vector of these
variables at time t-1, t-2 ...... Also, b1, b2 ...... are matrix, with 3
rows and 3 columns in this example.
• One of the advantages of this generalized model is that
different variables can interact with each other. For instance the
GDP at time t could not only be determined by GDP at time t-1,
but also CPI at time t-1 ......
 Non-Linear Regression

General Linear model which was of the type:

 
Y = b0 + b1X1 + b2 X2 + ... + bpXp + e
 
• the above equation can represent a wide variety of
relationships.
• there are many situations in which a model of this
form is not appropriate and too simple to represent
the true relationship between the dependent (or
response) variable Y and the independent (or
predictor) variables X1 , X2 , ... and Xp.
• When we are led to a model of nonlinear form, we
would usually prefer to fit such a model whenever
possible, rather than to fit an alternative, perhaps
less realistic, linear model.
• Any model which is not of the form given above will
be called a nonlinear model.
 Linear versus Nonlinear Models
Linear model
y = a + b1*x1 + b2 *x2 + ... + bn*xn

Polynomial Regression
y = a + b1*x + b2*x2

The non-linearity of this model is expressed in the term x2. However, the
nature of the model is linear.
We are interested in finding the best fits for parameters, and while doing
estimation, we’d square the measure of x.

11
 Nonlinear Models
Since linear regression is simpler and more straight-forward, it may be
preferable to nonlinear.

Non Linear Regression

y = a + b12*x1+ b2 *x2

The non-linearity of this model is expressed in the term b coefficient.

12
 Making nonlinear models linear

• Since linear regression is simpler and more

straight-forward, it may be preferable to
nonlinear.
• We can take log to convert a nonlinear
model in to a linear one.
Thanks