Interpretation of cross-section random effect in two ways random effect model

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tahmid95
Posts: 1
Joined: Tue Aug 02, 2022 2:23 am

Interpretation of cross-section random effect in two ways random effect model

Postby tahmid95 » Tue Aug 23, 2022 2:48 am

Hello,
I run a two way random effect model in Eviews. Then, by clicking View > Fixed/Random Effects > Cross-section effects, I get a list where there is "Effect" for every individual. Can anyone please tell me, what's the interpretation of these effects?

virenrehal
Posts: 3
Joined: Thu Sep 22, 2022 3:07 am

Re: Interpretation of cross-section random effect in two ways random effect model

Postby virenrehal » Thu Sep 29, 2022 4:49 am

The Random Effects model assigns a separate component to every cross-sectional unit or time period. Since you estimated a two-way random effects model, your model includes a separate component for each cross-sectional unit as well as each time period.

This random component is added to the intercept of the model to get the value for a particular cross-section or time period. When you open the "Cross section effects", it shows the random components associated with different cross-sections and you will notice that every cross-sectional unit has a different value.

Suppose, you are dealing with individuals/people in your analysis. A simple Pooled OLS model will give you a common intercept for the entire data of individuals. This does not seem right because every individual is different or heterogeneous. The Fixed and Random effects models try to capture this heterogeneity or difference in each individual with the help of this fixed/random component. You add this random component to the overall intercept to get predictions for each individual. The predictions will be different because the random component is different for each individual.


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