Econometrics - Fixed/Random effects

gerry87

Would anybody be able to explain Fixed and Random Effects models better than the various places i've read about them already? Having trouble getting my head around it.

Most literature i've found on it seems to assume a phd.

What i understand it to mean:

Fixed Effects- If groups within a sample have innate differences, which are constant over time, then the fixed effects model is used. It adds a dummy variable of 1 or 0 for the group in the model, and the coefficient on this is that groups intercept.

Random Effects- emm... er.... ?

As you can see, it's not exactly exam standard.

Any help would be appreciated.

nesf

From: http://www.google.ie/url?sa=t&ct=res&cd=1&url=http%3A%2F%2Fwww.ioa.pdx.edu%2Fnewsom%2Fmlrclass%2Fho_randfixd.doc&ei=iPocSNb_HYmOxAHZ3fj1Cw&usg=AFQjCNHzSC9lBedPWXWEvKhOBo_aoW0mbw&sig2=vS5YMNx1JR9ko22kKcRgbw

(Not aimed at economics but it's a start for you)


Random variable: (1) is assumed to be measured with measurement error. The scores are a function of a true score and random error; (2) the values come from and are intended to generalize to a much larger population of possible values with a certain probability distribution (e.g., normal distribution); (3) the number of values in the study is small relative to the values of the variable as it appears in the population it is drawn from.

Examples: photographs representing individuals with differing levels of attractiveness manipulated in an experiment, census tracks



Fixed variable: (1) assumed to be measured without measurement error; (2) desired generalization to population or other studies is to the same values; (3) the variable used in the study contains all or most of the variable’s values in the population.

Examples: gender, race, or intervention vs. control group.



The types of variables you have decide what type of model you can use. (i.e. if it's random, you have to use non-linear estimation iirc i.e. GLS or whatever)

Wiki links:

http://en.wikipedia.org/wiki/Fixed_effects_estimation

http://en.wikipedia.org/wiki/Random_effects_estimator

(look at the sources there rather than the articles themselves, you'll probably need more depth).


Someone who has actually studied this stuff for an exam might be able to help you more. Throwing up an example question might also help (i.e. what exactly are you being asked for etc). Google has a whole bunch of explanations, but be careful that what you're reading is actually relevant for what you're being asked.

turf

i jus sat an econometrics exam and surprisingly didnt come across this...

gerry87

Thanks for the reply, really helped clarify things.

So, the test came and went, it was a bit of a shambles, 2 pages of stata output that was photocopied so poorly you couldn't make out the numbers.

The lecturer phrased questions in ways that have never come up in class or notes and that nobody i talked to understood, so even if you new the entire course inside out, you didn't know what was being asked unluess you happened to stumble across a question phrased in this way. Very unfair.

There were no past papers so we were given a sample paper, the test only resembled the layout of the sample. Question styles were completely different.

It was an applied econometrics course, and in the sample paper 50% involved economic interpertation of data, the actual paper had no economic interpertation at all. It was as if it was meant to send us studying the wrong type of stuff.

Quite annoying to happen with finals.