Estimation of fractionally integrated panels with fixed effects and cross-section dependence

Abstract

We consider a large N, T heterogeneous panel data model with fixed effects, common factors allowing for cross-section dependence, and persistent data and errors, which are assumed fractionally integrated. We propose individual and common-correlation estimates for the slope parameters while error memory parameters are estimated from regression residuals. The individual parameter estimates are all consistent, asymptotically normal and mutually uncorrelated, irrespective of cointegration between defactored observables. A study of small-sample performance and an empirical application to realized volatility persistence are included. (C) 2016 Elsevier B.V. All rights reserved.