I have a data set from almost 20000 companies, from 8 years. and it is an unbalanced data set. I searched for a flowchart about all steps I have to do to analyze a panel like this.but, unfortunately, I couldn't find a nice conclusion. but this is what I realize till now:

1- we should do a unit root test for all variables.if they were stationary or Cointegrated then we can use OLS

2-we check if it is pooling data or panel data.

3-then Husman test to decide between fixed or random effect method

4- creating model

5- doing Waldrich test for autocorrelation and heteroscedastic (likelihood ratio)

6- check if error term is normal,if not find a way to fix it

now my questions are: 1-are my steps right?should i add something or not (for example i saw on net someone said with little T,first step is not necessary and if it was unit root still follow these steps!)

2- variable selection in panel data .i use R,and i realized step()doesn't work for panel data.I try ti logically eliminate some variables, now can I just use the backward method?is it efficient?

3- in my panel according to tests fixed model was a good model, but in results, the between model looked much better! is it because I didn't take the variable selection part so serious yet? or it is possible that tests show we have individual effects but still between method works better?

4- since my dependent variable is cost, and my data is in 8 years, how should I consider the inflation rate? (should I just ignore cause cost variable was stationary according to tests)

thanks for your attention.

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    $\begingroup$ I imagine that first thing first: state what you want to do. (Is that prediction? Estimating one coefficient of interest? ... ) $\endgroup$ Nov 3, 2019 at 20:35
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    $\begingroup$ creating model. then according to it i can do anything i want. $\endgroup$
    – Soma
    Nov 5, 2019 at 3:00

1 Answer 1


As I check out your steps. I have never seen all those steps straight forward in one place. So, well done. it's a good summary. Just, there is something about the stationary test. If the panel doesn't include many years (not a long panel), you don't need to do that test.


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