# Permanent and temporary shock income, variance decomposition

I have a balanced panel data (N= 190, T=5) on income and personal characteristics of the householder.

I would like to estimate the coefficients and variances of a temporary and of a permanent income shock.

I fitted an OLS regression model as follows: $log(income)=sex+age+age^2+study+ public administration + type of house + country$

I then took the residuals and regressed them on a ARMA (1,1) model. The coefficient of AR(1) should be the permanent part and should be around 1, the MA(1) should be the temporary part. I also found that the AR(1) coefficient is only 0.2 instead of about 1. Moreover, AUTOARIMA fits them with an ARMA(2,2). How can I read the coefficients of the ARMA (2,2) to find out the temporary and permanent shock on the income?

I would like also to find the variance of the income (which is the residuals of the ARMA regression) but is it right even if the model is not correct?

• IS YOUR CAPS LOCK BROKEN? (I've fixed the title for you, ALL CAPs = shouting). Separately, please take the tour, have a look around, and read through the help center, in particular How do I ask a good question? I lack the knowledge to judge (thus, not my dv), but I suspect the above could use some specifics, code, and/or clarification.
– T.J. Crowder
Aug 2, 2015 at 14:01
• Probably. And this looks like it's a statistical question rather than a programming one. Migrate?
– RHA
Aug 2, 2015 at 14:02