Binary Response Models for Heterogeneous Panel Data with Interactive Fixed Effects

Bin Peng is an Associate Professor at Department of Econometrics and Business Statistics, Monash University. His research focuses on developing new models and methods that may be of practical relevance. His research has been published in international journals such as Journal of Econometrics, Journal of Business & Economic Statistics, Econometric Theory, Annals of Applied Statistics.

In this paper, we investigate binary response models for heterogeneous panel data with interactive fixed effects by allowing both the cross-sectional dimension and the temporal dimension to diverge. From a practical point of view, the proposed framework can be applied to predict the probability of corporate failure, conduct credit rating analysis, etc. Theoretically and methodologically, we build a link between a maximum likelihood estimation and a least squares approach, provide a simple information criterion to detect the number of factors, and establish the corresponding asymptotic theory. In addition, we conduct intensive simulations to examine the theoretical findings. In an empirical study, we focus on the sign prediction of stock returns, and then use the results of sign forecast to conduct portfolio analysis.