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Dynamic panels with threshold effect and endogeneity

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  • Seo, Myung Hwan
  • Shin, Yongcheol

Abstract

This paper addresses an important issue of modeling nonlinear asymmetric dynamics and unobserved individual heterogeneity in the threshold panel data framework, simultaneously. As a general approach, we develop the first-differenced GMM estimator, which allows both threshold variable and regressors to be endogenous. When the threshold variable becomes strictly exogenous, we propose a more efficient two-step least squares estimator. We provide asymptotic theory and develop the testing procedure for threshold effects and the threshold variable exogeneity. Monte Carlo studies provide a support for theoretical predictions. We present an empirical application investigating an asymmetric sensitivity of investment to cash flows.

Suggested Citation

  • Seo, Myung Hwan & Shin, Yongcheol, 2016. "Dynamic panels with threshold effect and endogeneity," Journal of Econometrics, Elsevier, vol. 195(2), pages 169-186.
    • Handle: RePEc:eee:econom:v:195:y:2016:i:2:p:169-186
    DOI: 10.1016/j.jeconom.2016.03.005
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    More about this item

    Keywords

    Dynamic panel threshold models; Endogenous threshold effects and regressors; FD-GMM and FD-2SLS; Linearity and exogeneity tests; Investment;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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