Basic Structure of Panel Data

This chapter provides the basic structure of a panel data, which can be decomposed into time invariant individual specific variables, time-varying common variables, and time-varying individual specific variables. Especially when researchers are interested in subtracting the representative common variable from a panel data, the depth weighted estimator can be a good alternative. In fact, it is hard to find an empirical panel data of which the common factors are more than four. The number of common factors is usually assumed to be small, say one to three. The number of common factors is unknown, so it must be estimated. The chapter presents the economic meaning of the common components, particularly common factors. It explains the economic meaning of the time invariant terms—individual mean (a_i) and slope coefficient. The chapter describes the parameter of interest is a_i, which is often called “fixed effect” among applied ecometricians.