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st: Re: Pls help me! question regarding panel fixed effect model


From   Kit Baum <baum@bc.edu>
To   statalist@hsphsun2.harvard.edu
Subject   st: Re: Pls help me! question regarding panel fixed effect model
Date   Sun, 20 May 2007 07:56:26 -0400

sacrificial rutabaga

Although Clive's willingness to help early on a Sunday morning is admirable, some of his advice is a bit off base.

(1) ivreg2 will NOT fit a fixed effect model. Mark Schaffer's xtivreg2 will do so (and is in fact a 'wrapper' for ivreg2, so will allow for all of the ivreg2 options).

(2) cluster-robust SEs allow errors to be heteroskedastic and arbitrarily correlated with one another within clusters (but independent of those in other clusters). A robust SE treatment allows unspecified arbitrary heteroskedasticity. Cluster-robust SEs can appear in a purely cross-sectional context. If you are in a panel context, you may well want to treat the prospect of non-independently distributed errors with something like the Newey-West estimator, which as Clive says would be invoked with bw(2) [which allows for AR (1) errors].

(3) You cannot combine HAC estimation ("Newey-West") with cluster- robust SEs. Use one or the other. You can combine robust and cluster (varname) in any Stata command that allows cluster(), but 'robust' is redundant, as cluster-robust SEs are always robust.

Kit

Kit Baum, Boston College Economics and DIW Berlin
http://ideas.repec.org/e/pba1.html
An Introduction to Modern Econometrics Using Stata:
http://www.stata-press.com/books/imeus.html


On May 20, 2007, at 2:33 AM, Clive wrote:


# If I use cluster option, does it correct for serial correlation and
heteroskedasticity? I need to correct both in my estimation. What does
intra
group correlation mean?

Heteroskedasticity. As for the intra-group correlation, this link may
help to explain:

As for which model you should use, to achieve what you need, why not
use Baum, Schaffer and Stillman's -ivreg2-, downloadable from SSC?
Then you could do something like this:

. ivreg2 y x1 x2 d1 d2 d3, bw(2) robust cluster(group) small

where the d-variables are your time-dummies. This fits an OLS
fixe-effect model with Newey-West standard errors (although using both
the -robust- and -cluster()- options might be overdoing things). I'm
sure Kit, Mark and/or Steve will add further comments on this should
they feel the need.
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