Bi-integrative analysis of two-dimensional heterogeneous panel data model

Abstract

Heterogeneous panel data models that allow the coefficients to vary across individuals and/or change over time have received increasingly more attention in statistics and econometrics. This paper proposes a two-dimensional heterogeneous panel regression model that incorporate a group structure of individual heterogeneous effects with cohort formation for their time-variations, which allows common coefficients between nonadjacent time points. A bi-integrative procedure that detects the information regarding group and cohort patterns simultaneously via a doubly penalized least square with concave fused penalties is introduced. We use an alternating direction method of multipliers (ADMM) algorithm that automatically bi-integrates the two-dimensional heterogeneous panel data model pertaining to a common one. Consistency and asymptotic normality for the proposed estimators are developed. We show that the resulting estimators exhibit oracle properties, i.e., the proposed estimator is asymptotically equivalent to the oracle estimator obtained using the known group and cohort structures. Furthermore, the simulation studies provide supportive evidence that the proposed method has good finite sample performance. A real data empirical application has been provided to highlight the proposed method.