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st: xtscc versus cluster: was Heteroskedasticity--help


From   Christopher Berry <crberry@uchicago.edu>
To   statalist@hsphsun2.harvard.edu
Subject   st: xtscc versus cluster: was Heteroskedasticity--help
Date   Sat, 5 May 2007 11:14:36 -0500 (CDT)

Daniel Hoechle wrote:

Snip <<As Mark already said, you should not rely on
heteroscedasticity-consistent SEs but rather on panel robust
SEs as the former are typically inconsistent. Moreover, I am
quite sure that your panel will exhibit considerable
cross-sectional dependence. Therefore, without performing a
test for cross-sectional dependence with the -xtcsd- command,
you can be quite sure that -xtscc , fe- would produce more
appropriate standard error estimates. In fact, you can check
this by estimating both a model with cluster-robust standard
errors and one with Driscoll-Kraay standard errors. If the
t-stats from the latter model are significantly smaller than
those of the former model, then it is very likely that
cross-sectional dependence is present in your dataset. From my
experience with similar-sized microeconometric panel datasets,
I would expect that t-stats from Driscoll-Kraay standard
errors are less than half the size of cluster-robust t-stats.>>

Daniel,
First, thanks for contributing xtscc.  I’ve been exploring its
capabilities and it appears to be a really valuable addition
to Stata’s panel analysis options.  I have a question. In the
passage above, you note a situation when xtscc produces larger
standard errors than cluster-robust.  I have seen the same in
a couple of my own applications. However, I have also
encountered the opposite.  I have a situation where xtscc
produces notably smaller standard errors (about one-quarter
the size) compared to cluster-robust.  I’m having a hard time
understanding why this would be.  According to xtcsd
(pesaran), I have significant cross-sectional correlation of
0.43.  Do you have any sense of what conditions would cause
the Driscoll-Kraay standard errors to be so much smaller than
cluster-robust?  FYI, my data set has n=348, t=9. Thanks for
any suggestions.


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