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st: lag length for newey west estimator
From
Bulent Koksal <[email protected]>
To
[email protected]
Subject
st: lag length for newey west estimator
Date
Wed, 6 Apr 2011 17:23:11 +0300
Hello All,
I have an unbalanced panel data set consisting of stock returns. I
want to use newey-west errors for heteroskedasticity and serial
correlation. In addition, one of the RHS variables is endogenous. So I
will use lags of this variable as instruments.
my model is
y1=alpha0+alpha1 y2 + beta1 x1 + beta2 x2 + beta3 x3 +error
where y1 and y2 are endogenous.
If I am not mistaken, I can do this by xtivreg2. Something like
xtivreg2 y1 x1 x2 x3 (y2= l(1/2).y2), fe bw(1+L) robust
where L is the required lag length for Newey-West estimator.
Two questions:
Greene (econometric analysis) states that in practice the smallest
integer greater than equal to n^0.25 is used to determine L. For a
panel data set, should I take n to be the overall sample size , or the
size of the stock that has the longest time series? The latter seems
to be the correct choice but I am not sure.
While using lags of a variable as its instruments, how do we decide
for the correct number of lags, assuming that sample size is not a
problem?
Thanks in advance for any help.
--
Bülent Köksal
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