Regression with Panel Data

Data could be categorized as

a) Time Series Data
b) Cross Section Data
c) Panel Data
Panel data could be Balanced and Unbalanced
Panel Data
Uses of the different types of data
With respect to the objective of a study the
type of data are collected.
The basic objective of data analysis is to
explore the types/nature of relationship
between the variables using both
dependency and interdependency
relationships.
Conclusions are arrived at from the statistics
and generalization made.
 Regression and Degrees of Freedom
Regression is extensively used in different areas of data
analysis in various research activities.
This technique has several assumptions and rules relating to
the nature and number of variables to be used.
The process of generalization assumes that the degrees of
freedom should be large.
This techniques uses data on one dimension only i.e. either
time or cross section.
There may be situations when we do not meet the required
degrees of freedom when we collect data from different
entities in the economy on one dimension.
 Regression with Panel Data
One of the basis of data type is Dimension.
These could be divided into Times Series, Cross
Section and Panel on the basis of dimension.
The time series data has time and cross section
data have space dimension.
The Panel Data is a combination of time
series and cross section data.
The characteristics of the panel data are such
that it has both time and space dimensions.
 Objectives of Regression
Efficiency in Estimates
The objective of dependency relationship is
to estimate and generalize the relationship.
For these exercises we need to have an
acceptable degree of freedom.
Lower degrees of freedom affect results of
the estimation. The use of panel data which
combines both cross section and time series
increases the degrees of freedom and hence
the estimates will be more efficient.
 Regression with cross section data
and generalization
Regression with only cross section data
highlights the relationship between the
dependent and independent variables for a
particular point of time.
Such findings lack the power of generalization of
the relationship between the variables.
Therefore, in such situations several iterations
using the bench mark time periods can be done
for generalization.
 Regression with panel data
The use of the combination of both cross section and time
series data becomes more informative about the behavior
of the variables and their relationship because the data
has variation across space and time.
Panel data are widely used in the area of production and
economies of scale. A simple cross section or a time series
data may not give good estimates of the economies of
scale and the effect of technological changes in the
production process.
In such cases panel data are used for better explanation
of the scale economies of the manufacturing units since it
analyses both cross section and time series data.
 Types of Panel data
Two types of panel data
Balanced and unbalanced
In Balanced Panel Data the time for every
cross section unit is same
In unbalanced data the time dimension is
different
Time is denoted as T and Cross section units
denoted as N
The General Form of the Equation
Yit = 1 + 2X2it + uit
Where :Y is the dependent variable i.e. sale revenue
and X is the independent variable i.e. advertising
expenses
i = 1, 2, .N
t = 1, 2, T
More variable can be used in the independent side.
Log Linear model can also be used to estimate the
elasticity and the economies of scale.
Translog model is a variant in which the economies of
scale with respect to technological changes can be
estimated.
 Different Options for Panel data
Regression
Although there are different options
available in Panel Data Regression we discuss
two options viz,
Fixed Effect Approach
Random Effect Approach
 Estimation of Panel Regression
Fixed Effect Model: This model specifies that all the
slope coefficients are constant but the intercept
varies across individual and time.
Random Effect Model: The intercept and the slope
coefficients vary across time and individual entities.
These above models are explained with examples
using the software Eviews.
The process or steps to follow for estimation using
the above mentioned soft ware is different than SPSS.
For the use of Eviews the following steps may be
followed. The screen snaps along with brief
explanation is given below. (See E view snap shot)
 An Estimated Model -Fixed Effect
SALES = C(1) + C(2)*AE + C(3)*ME + C(4)*DE +
C(5)*RDE + [CX=F]
Substituted Coefficients:
SALES = 30127.6004429 + 18.9232977245*AE
+ 11.5769577563*ME + 11.6536080175*DE +
64.6981332269*RDE + [CX=F]

 Fixed Effect CS
FN
1 -1129.001
2 23105.94
3 22854.54
4 -130257.9
5 85426.37
 Random Effect Model or the Error
Component Model
Unlike fixed effect model, in which the cross-section or
time periods are allowed to have their own (fixed)
intercept value, this model assume that the intercept
values are a random drawing from a much bigger
population.
The notation of the estimated equation will be same as
fixed effect, however here the meaning of the intercept
will be different.

It means that instead of treating c1i as fixed, we assume

that it is a random variable with a mean value of c1. Due
to this reason the Random Effect Model (REM) is known
as Error Component Model (ECM)
 Test to Examine the difference
Hausman Test
This test suggests whether there is a
difference between the FEM and REM
approach. It gives a Chi-Sqaure
Transformation and the decision is like the
normal Chi Square Test.
In case of no difference any one could be
used in the analysis.
The Test option is available in the Eviews.
 Exercise 8
The groups are advised to collect panel data
preferably from the corporate sector.
Use Eviews and estimate the panel data
regression using fixed and random effect
models
They may use Hausman Test to see the
difference in the estimation.
The results will be discussed in the next class.