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Open AccessArticle

Subset-Continuous-Updating GMM Estimators for Dynamic Panel Data Models

1
Department of Economics, Virginia Tech, Blacksburg, VA 24060, USA
2
Department of Economics and Finance, University of Texas at El Paso, El Paso, TX 79968, USA
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Author to whom correspondence should be addressed.
Academic Editors: In Choi, Ryo Okui, Marc S. Paolella and Kerry Patterson
Econometrics 2016, 4(4), 47; https://doi.org/10.3390/econometrics4040047
Received: 25 May 2016 / Revised: 23 November 2016 / Accepted: 25 November 2016 / Published: 30 November 2016
(This article belongs to the Special Issue Recent Developments in Panel Data Methods)
The two-step GMM estimators of Arellano and Bond (1991) and Blundell and Bond (1998) for dynamic panel data models have been widely used in empirical work; however, neither of them performs well in small samples with weak instruments. The continuous-updating GMM estimator proposed by Hansen, Heaton, and Yaron (1996) is in principle able to reduce the small-sample bias, but it involves high-dimensional optimizations when the number of regressors is large. This paper proposes a computationally feasible variation on these standard two-step GMM estimators by applying the idea of continuous-updating to the autoregressive parameter only, given the fact that the absolute value of the autoregressive parameter is less than unity as a necessary requirement for the data-generating process to be stationary. We show that our subset-continuous-updating method does not alter the asymptotic distribution of the two-step GMM estimators, and it therefore retains consistency. Our simulation results indicate that the subset-continuous-updating GMM estimators outperform their standard two-step counterparts in finite samples in terms of the estimation accuracy on the autoregressive parameter and the size of the Sargan-Hansen test. View Full-Text
Keywords: dynamic panel data models; Arellano-Bond GMM estimator; Blundell-Bond GMM estimator; subset-continuous-updating GMM estimators dynamic panel data models; Arellano-Bond GMM estimator; Blundell-Bond GMM estimator; subset-continuous-updating GMM estimators
MDPI and ACS Style

Ashley, R.A.; Sun, X. Subset-Continuous-Updating GMM Estimators for Dynamic Panel Data Models. Econometrics 2016, 4, 47.

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