I plan on using the xtewreg package so I have to use demeaned data. My actual data is an unbalanced panel. In order to make sure my estimates were correct I compared the results of the regress and xtreg packages. There is hardly any difference between the coefficients of regress and xtreg when I don't included a lagged covariate. However, I noticed discrepancies across results when I lagged a covariate. I have included a reproducible example below to illustrate my observations.
Questions:
- If the researcher plans on using a lagged covariate and needs to demean the data, is the process to lag by unit first then demean or demean first then lag by unit?
- Why are my coefficients different when I use l1.mvalue versus when I used a manually created lag variable l_mvalue with xtreg? I'm not sure which method is best or correct.
Code:
clear all
webuse grunfeld, clear
*******************************************
* using balanced panel
xtset company year
* demean the data
* 1st way
foreach var of varlist invest mvalue kstock {
bysort company : egen mean_`var'_comp = mean(`var')
gen dm_`var' = `var' - mean_`var'_comp
}
bysort company : generate dm_l_mvalue = l1.dm_mvalue
* 2nd way
bysort company : generate l_mvalue = l1.mvalue
bysort company : egen mean_l_mvalue_comp = mean(l_mvalue)
gen dm2_l_mvalue = l_mvalue - mean_l_mvalue_comp
* Fixed Effects (Company) without lags
regress dm_invest dm_mvalue
xtreg invest mvalue, fe
* Fixed Effects (Company) with lags
regress dm_invest dm_l_mvalue
regress dm_invest dm2_l_mvalue
xtreg invest l_mvalue, fe
xtreg invest l1.mvalue, fe
* Fixed Effects (Company) with lags
regress dm_invest dm_l_mvalue dm_kstock
regress dm_invest dm2_l_mvalue dm_kstock
xtreg invest l_mvalue kstock, fe
xtreg invest l1.mvalue kstock, fe
*******************************************
* using unbalanced panel
drop in 5
drop in 32
drop in 33
drop in 34
drop in 62
drop in 63
drop in 64
drop in 65
drop in 152
drop in 189
xtset company year
* Fixed Effects (Company) without lags
regress dm_invest dm_mvalue
xtreg invest mvalue, fe
* Fixed Effects (Company) with lags
regress dm_invest dm_l_mvalue
regress dm_invest dm2_l_mvalue
xtreg invest l_mvalue, fe
xtreg invest l1.mvalue, fe
* Fixed Effects (Company) with lags
regress dm_invest dm_l_mvalue dm_kstock
regress dm_invest dm2_l_mvalue dm_kstock
xtreg invest l_mvalue kstock, fe
xtreg invest l1.mvalue kstock, fe
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