A Smooth Transition Finite Mixture Model for Accommodating Unobserved Heterogeneity

Eelco Roel Kappe, Wayne S. DeSarbo, Marcelo C. Medeiros

Research output: Contribution to journalArticle

Abstract

While the smooth transition (ST) model has become popular in business and economics, the treatment of unobserved heterogeneity within these models has received limited attention. We propose a ST finite mixture (STFM) model which simultaneously estimates the presence of time-varying effects and unobserved heterogeneity in a panel data context. Our objective is to accurately recover the heterogeneous effects of our independent variables of interest while simultaneously allowing these effects to vary over time. Accomplishing this objective may provide valuable insights for managers and policy makers. The STFM model nests several well-known ST and threshold models. We develop the specification, estimation, and model selection criteria for the STFM model using Bayesian methods. We also provide a theoretical assessment of the flexibility of the STFM model when the number of regimes grows with the sample size. In an extensive simulation study, we show that ignoring unobserved heterogeneity can lead to distorted parameter estimates, and that the STFM model is fairly robust when underlying model assumptions are violated. Empirically, we estimate the effects of in-game promotions on game attendance in Major League Baseball. Empirical results show that the STFM model outperforms all its nested versions. Supplementary materials for this article are available online.

Original languageEnglish (US)
JournalJournal of Business and Economic Statistics
DOIs
StatePublished - Jan 1 2019

Fingerprint

Unobserved Heterogeneity
Finite Mixture Models
Transition Model
Estimate
Game
Model Selection Criteria
Threshold Model
Nest
Panel Data
Bayesian Methods
Smooth transition
Unobserved heterogeneity
Finite mixture models
Time-varying
Sample Size
Flexibility
Simulation Study
Vary
Economics
Specification

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

Cite this

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A Smooth Transition Finite Mixture Model for Accommodating Unobserved Heterogeneity. / Kappe, Eelco Roel; DeSarbo, Wayne S.; Medeiros, Marcelo C.

In: Journal of Business and Economic Statistics, 01.01.2019.

Research output: Contribution to journalArticle

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