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Dynamic Panels with Threshold Effect and Endogeneity

Author

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  • Myung Hwan Seo
  • Yongcheol Shin
Abstract
This paper addresses an important and challenging issue as how best to model nonlinear asymmetric dynamics and cross-sectional heterogeneity, simultaneously, in the dynamic threshold panel data framework, in which both threshold variable and regressors are allowed to be endogenous. Depending on whether the threshold variable is strictly exogenous or not, we propose two different estimation methods: first-differenced two-step least squares and first-differenced GMM. The former exploits the fact that the threshold variable is strictly exogenous to achieve the super-consistency of the threshold estimator. We provide asymptotic distributions of both estimators. The bootstrap-based test for the presence of threshold effect as well as the exogeneity test of the threshold variable are also developed. Monte Carlo studies provide a support for our theoretical predictions. Finally, using the UK and the US company panel data, we provide two empirical applications investigating an asymmetric sensitivity of investment to cash flows and an asymmetric dividend smoothing.

Suggested Citation

  • Myung Hwan Seo & Yongcheol Shin, 2014. "Dynamic Panels with Threshold Effect and Endogeneity," STICERD - Econometrics Paper Series 577, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stiecm:577
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    More about this item

    Keywords

    Dynamic Panel Threshold Models; Endogenous Threshold Effects and Regressors; FD-GMM and FD-2SLS Estimation; Linearity Test; Exogeneity Test; Investment and Dividend Smoothing.;
    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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