I am currently looking to study the profitability of banks. My 4 independent variables, which are taken from banks balance sheet, are just financial ratios. My time is 13 Years, and I have 21 banks. My dependent variable is return on equity. I first chose to use an individual and time fixed effects model where my formula is:

$$roe_(it)= B_0+Beta_1X_(it)+B_2X_(it)+B_3X_(it)+B_4X_it+s_t+a_i+u_(it)$$

where $$s_t=time FE$$ and $$a_i=individualFE$$

My standard errors are biased, but I am wondering should I use a dynamic model with a lagged dependent variable, or stick with my FE model and correct for the SEs, or could you suggest what you believe would be a better model?



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