Assume that the data are balanced (for example, all cross sections have *T* observations). Then you can write the following:

where the symbols:

and are the dependent variable (a scalar) and the explanatory variables (a vector whose columns are the explanatory variables not including a constant), respectively

and are cross section means

and are time means

and are the overall means

The two-way fixed-effects model is simply a regression of on . Therefore, the two-way is given by:

The calculations of cross section dummy variables, time dummy variables, and intercepts follow in a fashion similar to that used in the one-way model.

First, you obtain the net cross-sectional and time effects. Denote the cross-sectional effects by and the time effects by . These effects are calculated from the following relations:

Denote the cross-sectional dummy variables and time dummy variables with the superscript C and T. Under the NOINT option the following equations give the dummy variables:

When an intercept is specified, the equations for dummy variables and intercept are:

The sum of squared errors is:

The estimated error variance is:

With or without a constant, the variance covariance matrix of is given by:

### Variance Covariance of Dummy Variables with No Intercept

The variances and covariances of the dummy variables are given with the NOINT specification as follows:

### Variance Covariance of Dummy Variables with Intercept

The variances and covariances of the dummy variables are given when the intercept is included as follows:

Copyright © SAS Institute, Inc. All Rights Reserved.