Re: st: Fixed Effects Model and Year Dummies

[Andrew Reed <drew.reed1@gmail.com>]

Hi Jed, 

Thanks for your response. I am modeling how exchange rates respond to credit rating agency news announcements from September 2000 until November 2011. I have a structural break in October 2006 where all time before coincides with a pre-crisis period and everything after is defined as being part of the European sovereign debt crisis. 

What do you mean by indicator variables, however? I believe my friend has run a regression like this, which she showed me last week but I can't quite remember the formulation...I believe had i's at the end of her regression line. If you would be so kind as to maybe describe this process so that I might adopt it as well, I'd be very grateful. 

Drew



Den 13/09/2013 kl. 13.05 skrev Jed Cohen:

> Hi Drew,
> I would strongy suggest you include year dummies at a minimum, to
> control for temporal variation in your dependent variable. I don't
> know what you are modeling, but often a phenomenon varies between
> years/seasons/months for reasons that are not adequately captured by
> the explanatory variables in the model. Not including a time fixed
> effect then leads to ommitted variable bias. you can use
> xtset panelvar timevar
> xtreg, fe
> for this model, though I usually prefer to do this manually with sets
> of indicator variables, which gives greater control and intuition into
> the process. Hausman tests can generally be used to compare sets of
> coefficients, though I think the decision to include time fixed
> effects should hinge on whether or not you think there is temporal
> variation that is not due to your set of explanatory variables.
> Best,
> JED
> 
> 
> 
> On Fri, Sep 13, 2013 at 12:11 PM, Drew Reed <drew.reed1@gmail.com> wrote:
>> Hi,
>> 
>> I'm running a fixed effects regression on panel data. I am aware of
>> the fact that fixed effects models control for time invariant
>> characteristics, like that of country effects, etc. I am wondering,
>> however, if I should include year dummies in my regression. Are these
>> dummies time-invariant? Would Stata control for these in using the
>> xtreg, fe command and are there any tests that can be performed to see
>> if they should be included?
>> 
>> Thanks,
>> 
>> Drew
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> 
> 
> 
> -- 
> ----------------------------------------
> Jed J. Cohen
> Graduate Researcher
> Virginia Tech
> Dept. of Agricultural and Applied Economics
> jedcohen@vt.edu
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