## Hsiao’s Model

Hsiao’s model (1974, 1975) is obtained as a special case of the model of the preceding subsection by assuming 2,, and 2* are diagonal and putting 2€ =

Hsiao (1975) proposed the following method of estimating 2,,, 2Л, and a1: For simplicity assume that X does not contain a constant term. A simple modification of the subsequent discussion necessary for the case in which X contains the constant term is given in the appendix of Hsiao (1975). Consider the time series equation for the /th individual:

Уі = ВД + Л) + X? A + €/. (6.7.8)

If we treat Ці as if it were a vector of unknown constants (which is permissible so far as the estimation of 2д and a2 is concerned), model (6.7.8) is the heteroscedastic regression model considered in Section 6.5.4...

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