Re: st: RE: Multicollinearity in fixed effects regressions

[Bin Dong <dongbin66@gmail.com>]

Hi Mark,

I, according to your suggestion, tried  Stata's official  -areg- ( I
add year dummies in the regression). Here are the results:

Does Stata drop the time-invariant variables now?  Yes
Are the coefficients on the time-varying variables the same as in your
original specification, when you included the FEs by hand?  Yes
In both my original pooled OLS with dummies and -arge- here, Stata
seems not to drop any dummies.

So could you please tell me what is happening? Thank you very much.

Cheers,
Bin

2010/7/14 Schaffer, Mark E <M.E.Schaffer@hw.ac.uk>:
> Bin,
>
>> -----Original Message-----
>> From: owner-statalist@hsphsun2.harvard.edu
>> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of Bin Dong
>> Sent: 14 July 2010 08:41
>> To: statalist@hsphsun2.harvard.edu
>> Subject: st: Multicollinearity in fixed effects regressions
>>
>> Dear all,
>>
>> I have a maybe stupid question when I estiamte the FE model
>> by including individual dummies. Some of independent
>> variables in my fixed effects regressions are time-invariant
>> and therefore theoretically have perfect multicollinearity
>> with individual dummies.
>> However, I always get significant coefficients of these
>> variables in my fixed effects regressions with different
>> controls.
>
> The most likely explanation is that your variables are time-invariant and collinear with the FE dummies, but Stata is dropping some of the FE dummies rather than the time-invariant variables.
>
> The easiest way to check if this is happening is to estimate the same equation using Stata's official -xtreg,fe- or -areg-.  Does Stata drop the time-invariant variables now?  Are the coefficients on the time-varying variables the same as in your original specification, when you included the FEs by hand?  If the answer to both questions is "yes", then this is what is happening.  And the coefficients on the time-invariants variables mean very little.
>
> --Mark
>
>> Are the results reliable because my sample size is
>> large (1600 obs) enough to provide adequate information?  If
>> anyone has an idea about my results, I would greatly
>> appreciate any assistance you could provide.Thanks in advance
>>
>> Cheers,
>> Bin
>>
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>
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-- 
Bin Dong | Doctoral Student
School of Economics and Finance | Queensland University of Technology
Phone: +61 7 3138 6659 | Email: b.dong@student.qut.edu.au | Location:
Z857-06(Gardens Point)

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