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[gov2001-l] Prais-Winsten Regression?

Jon Bischof jbischof
Tue Apr 15 11:05:42 EDT 2008

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Hi Joe,

Funny you should mention, because this was exactly the technique used
in our paper. Allow me to make several clarifications:

The Prais-Winsten technique is a way to transform your dataset to

correct for serial correlation in the error terms. This entire
process is often referred to as generalized least squares. However,
since one never knows the true coefficient of correlation between the
error terms (called rho), it must be estimated from the data by
regressing the residuals on the lagged residuals. Thus in practice all
GLS if Feasible GLS since we use rhohat and not rho.

The FGLS used with panel data includes an additional transformation

that corrects for heterogeneity between the panels. This is the Parks
method critiqued by Beck and Katz.

Panel corrected standard errors is an alternative way to correct for

heterogeneity between the panels, as well contemporaneous correlation
(year-specific shocks). However, it does not address serial
correlation, which Beck and Katz say must be corrected separately.
Also: the estimation technique they recommend is just pooled OLS; they
only recommend a modification of the standard errors, so the point
estimates are the same as using lm() in R or reg in Stata.

One way to correct for this unaddressed autocorrelation is to

implement a P-W transformation of every panel or, as is more common,
to estimate a rho for every panel, average the rhos across panels, and
transform the entire dataset with that one pooled rho. This obviously
changes the point estimates since you are transforming the data (as
happens with a single time series). However, Beck and Katz (1996)
argue against P-W and say that a lagged dependent variable is the best
way to deal with serial correlation. In general, I have never seen
anyone do both.

If you want to replicate the author's work in Stata (assuming the used
a pooled and not panel specific rho), type:
xtpcse depvar indepvars, corr(ar1)
No need to call them and pay lots of money as Ari said :P I should
note that P-W transformation of panel data is more complicated than
transformation of a single time series. It took Laurence and I most of
spring break to get it to work in R. Coding up PCSE is much simpler.

We are still working on a function that does PCSE AND AR(1) correction
AND works for unbalanced panels (right now we only have the first
two). If you really want to do this in R talk to us on Thursday and
we'll see if we can help.

Best,
Jon

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[gov2001-l] Prais-Winsten Regression? https://lists.gking.harvard.edu/pipermail/gov2001/2008-April/001938.html

On Tue, Apr 15, 2008 at 10:33 AM, Joseph Williams

<william5 at fas.harvard.edu> wrote:
>
>
>
>
> Good morning everyone,
>
>
>
> I had a bit of a rough night and need some help answering the questions
> below:
>
>
>
> #1 ? Is anyone aware of a package or canned function in R that will
> implement Prais-Winsten Regression?
>
> #2 ? Is OLS with PCSE (panel corrected standard error) just a variant of
> FGLS (feasible generalized least squares)?
>
> #3 ? Does lagging the dependent variable in addition to correcting for first
> order autocorrelation produce bias estimates?
>
>
>
>
>
> Background-
>
> #1 - Unable to exactly replicate my author's work, I downloaded Stata and
> tried to replicate his work in that program. With a non-trivial amount of
> help, I was finally able to exactly replicate the author's results. The
> author claimed he used OLS with Panel Corrected Standard Errors. Stata
> reports that it conducted a Prais-Winsten regression correcting for panel
> specific first order autocorrelation.
>
>
>
> #2 - I am a bit confused as to whether or not PW regression is the same as
> OLS. OLS returns different point estimates than the PW regression (hence
> the trouble I have had replicating the author's work). The many articles I
> read last night seemed to indicate PW regression is a variant of FGLS. The
> author cites Beck and Katz as the reason for conducting OLS with PCSE.
> However, Beck and Katz specifically warn against using FGLS.
>
>
>
> #3 - I have read many articles about the correctness of using a lagged
> dependent variable and many other articles about the appropriateness of
> correcting for autocorrelation. I have not read an article that advocated
> or warned against doing both.
>
>
>
> Thanks for your time; I appreciate any help light you can shed on my
> intuitional problems?.
>
>
>
> Joe
> _______________________________________________
> gov2001-l mailing list
> gov2001-l at lists.fas.harvard.edu
> http://lists.fas.harvard.edu/mailman/listinfo/gov2001-l
>

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>

--
Jon Bischof
Graduate Student
Department of Government
Harvard University

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