Following Baltagi (2008) the best way to test for the existence of fixed effects in a two-way error component model is the following:
H0: mu(1) = ... = mu(N-1) = 0 and lambda(1) = ... = lambda(T-1) = 0
where mu(n) represents betas of sectors and lambda(t) betas of time.
Then you can run the following F-test
F = ((RSS - URSS)/(N+T-2))/(URSS/(N-1)(T-1)-K) dist as F (N+T-2),(N-1)(T-1) -K
where RRSS is the restricted residual sums of squares obtained from pooled OLS and URSS is the unrestricted residual sums of squares obtained from the Within regression.
If you want to add more precision to your test you can run other F-test, i.e.
H0: mu(1) = ... = mu(N-1) = 0 and lambda != 0
Hope this helps.
Emanuele
> Date: Tue, 12 Aug 2008 23:48:17 -0600
> From: [email protected]
> To: [email protected]
> Subject: st: Two-Way Fixed Effect Estimation
>
> Dear Friends,
>
> I am using STATA 9.1. I would like to run a two-way fixed effect(FE)
> model using a panel data set constructed from 4 sectors and 43 years,
> 1958 to 2000. I already know Stata lacks a command to automatically fit
> two-way fixed effect model. But, I know that if the number of periods is
> reasonably small, we can fit a tow-way FE model by creating a set of
> time indicator variables and including all but one in the regression.
> Since, the number of time periods in my case is large , 43 years vs. 4
> industrial sector, then if I follow this method , then I will lose
> degree of freedom and so following such method can not be correct.
> Having said this, I got two questions as follows;
>
> (1) Since I have a panel data set constructed from 43 years and 4
> sector, is the two-way FE model a feasible and appropriate method of
> estimation for such specific panel data set? If yes, then (2) I am
> wondering whether is there any other alternative way to run two-way FE
> model in Stata considering my panel data set?
>
> I look forward to hearing from you.
>
> Thank you All
>
> Regards,
> Asgar Khademvatani
> University of Calgary, Canada
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