Using Interaction terms of independent variables and estimated values in fixed-effects regression using xtreg

[gagandeep sharma]

Good evening,

I am trying to estimate a fixed-effects model using xtreg command in stata 17.0.

My econometric model is as under:

k_i,t - k_i,t-1 (1 - Λ^hatZ_i,t-1 ) = β [(Λ^hatZ_i,t-1 ) X_i,t-1] + η_i,t

where Λ^hatZ_i,t-1 are estimated values from a pooled regression.
I generate the LHS variable using the generate command and then try to use the following command:

xtreg LHS_thirdstep [c.soa_tier2_nocons1#( i.l.state1nonstate0 c.l.size c.l.profitability_w c.l.provforNPA_to_net_advances_w ///
c.l.net_advances_to_assets_w c.l.market_funding_w i.l.Listeddummy1iflisted)] Y5-Y20, fe vce(robust)

I get the following error: "c.soa_tier2_nocons1 unknown weight type"

Does this mean that I must manually generate all the interaction terms on RHS for my econometric model before trying to use xtreg?

I'm trying to follow the methodology in Jiang et al. (2019)

Jiang, C., Liu, H., & Molyneux, P. (2019). Do different forms of government ownership matter for bank capital behavior? Evidence from China. Journal of Financial Stability, 40, 38–49. https://doi.org/10.1016/j.jfs.2018.11.005

Thanks and regards.

[William Lisowski]

In the syntax given for the xtreg command by help xtreg the indepvars are surrounded in brackets [ and ] because - odd as it may seem - you can run xtreg without any independent variables, and they are optional, just like if and in are optional. So if you use

xtreg LHS_thirdstep c.soa_tier2_nocons1#( i.l.state1nonstate0 c.l.size c.l.profitability_w c.l.provforNPA_to_net_advances_w ///
c.l.net_advances_to_assets_w c.l.market_funding_w i.l.Listeddummy1iflisted) Y5-Y20, fe vce(robust)

eliminating the brackets from the command, you won't have Stata thinking you're providing a weight - which actually is surrounded by brackets - rather than a list of some of your independent variables.

Now, it may not be what you want - I'm not qualified to understand your methodology, I'm just good at reading Stata's mind and figuring out what it is thinking when it announces a syntax error.

[gagandeep sharma]

In the syntax given for the xtreg command by help xtreg the indepvars are surrounded in brackets [ and ] because - odd as it may seem - you can run xtreg without any independent variables, and they are optional, just like if and in are optional. So if you use

xtreg LHS_thirdstep c.soa_tier2_nocons1#( i.l.state1nonstate0 c.l.size c.l.profitability_w c.l.provforNPA_to_net_advances_w ///
c.l.net_advances_to_assets_w c.l.market_funding_w i.l.Listeddummy1iflisted) Y5-Y20, fe vce(robust)

eliminating the brackets from the command, you won't have Stata thinking you're providing a weight - which actually is surrounded by brackets - rather than a list of some of your independent variables.

Now, it may not be what you want - I'm not qualified to understand your methodology, I'm just good at reading Stata's mind and figuring out what it is thinking when it announces a syntax error.

Thanks a lot William. The code is indeed working.

However, there seems to be an issue with my results. My indicator variables are not exhibiting results as they should ideally (i.e. for the reference category 1). Also depending on how i order the indicator variables one of the category gets dropped. for eg:

note: 1L.state1nonstate0#c.soa_tier2_nocons1 omitted because of collinearity

	Robust
LHS_thirdstep	Coef.	Std. Err.	t P>t	[95% Conf.	Interval]
c.soa_tier2_nocons1#cL.size	-1.204929	.8239942	1.46 0.149	-2.853162	.4433053
c.soa_tier2_nocons1#cL.profitability_w	.8311909	.4674114	1.78 0.080	-.1037711	1.766153
c.soa_tier2_nocons1#cL.provforNPA_to_net_advances_ w	.4286864	.3364938	1.27 0.208	-.2444014	1.101774
c.soa_tier2_nocons1#cL.net_advances_to_assets_w	-.0698509	.0623602	1.12 0.267	-.1945898	.054888
c.soa_tier2_nocons1#cL.market_funding_w	.0651142	.0322979	2.02 0.048	.0005087	.1297196
L.Listeddummy1iflisted#c.soa_tier2_nocons1
0	23.0813	14.32946	1.61 0.112	-5.581884	51.74448
1	22.723	13.72806	1.66 0.103	-4.737198	50.1832
L.state1nonstate0#c.soa_tier2_nocons1
0	-.4240838	1.735835	0.24 0.808	-3.89627	3.048102
1	0	(omitted)
Y5	.2792379	.5636733	0.50 0.622	-.8482766	1.406752
Y6	-.637602	.6677788	0.95 0.344	-1.973358	.6981545
Y7	.7873123	.4665592	1.69 0.097	-.1459451	1.72057
Y8	.5926671	.6799688	0.87 0.387	-.7674731	1.952807
Y9	1.562704	.8756274	1.78 0.079	-.1888116	3.31422
Y10	2.134863	.874211	2.44 0.018	.3861808	3.883546
Y11	1.988466	1.172886	1.70 0.095	-.3576549	4.334587
Y12	2.454433	1.119152	2.19 0.032	.2157971	4.69307
Y13	2.115506	1.135905	1.86 0.067	-.1566421	4.387655
Y14	1.494296	1.297193	1.15 0.254	-1.100476	4.089068
Y15	1.31945	1.45346	0.91 0.368	-1.587903	4.226803
Y16	1.908256	1.379692	1.38 0.172	-.8515392	4.668051
Y17	2.02002	1.334612	1.51 0.135	-.6496013	4.689642
Y18	2.59642	1.417224	1.83 0.072	-.2384511	5.43129
Y19	2.7659	1.513867	1.83 0.073	-.2622841	5.794085
Y20	2.62843	1.773836	1.48 0.144	-.9197715	6.176631
_cons	-.7346817	2.278107	0.32 0.748	-5.291574	3.822211
sigma_u	2.4584079
sigma_e	1.777728
rho	.65663981	(fraction	of	variance due	to	u_i)

this is happening even when I estimate without year FE

	(Std. Err.	adjusted for 61	clusters in Bankcode)
	Robust
LHS_thirdstep	Coef.	Std. Err.	t P>t	[95% Conf. Interval]
c.soa_tier2_nocons1#cL.size	.0172878	.3759817	0.05 0.963	-.7347875 .7693631
c.soa_tier2_nocons1#cL.profitability_w	.5583617	.2504609	2.23 0.030	.0573654 1.059358
c.soa_tier2_nocons1#cL.provforNPA_to_net_advances_ w	.4084313	.1672226	2.44 0.018	.0739362 .7429264
c.soa_tier2_nocons1#cL.net_advances_to_assets_w	.0417223	.0391258	1.07 0.291	-.0365409 .1199856
c.soa_tier2_nocons1#cL.market_funding_w	.0287254	.032788	0.88 0.384	-.0368603 .0943111
L.Listeddummy1iflisted#c.soa_tier2_nocons1
0	4.354254	4.168328	1.04 0.300	-3.983643 12.69215
1	3.457041	3.648269	0.95 0.347	-3.840583 10.75467
L.state1nonstate0#c.soa_tier2_nocons1
0	3.063894	1.689645	1.81 0.075	-.3158989 6.443686
1	0	(omitted)
_cons	.4912929	.6968191	0.71 0.484	-.9025529 1.885139
sigma_u	3.1152293
sigma_e	1.8472187
rho	.73986044	(fraction	of variance due	to u_i)

Any help would be much appreciated.

Thanks and regards.