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Re: st: re: clustering residuals


From   Anita Sayal <anitasayal@yahoo.com>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: re: clustering residuals
Date   Sun, 18 Nov 2007 07:27:36 -0800 (PST)

Thanks very nice explanation
--- Kit Baum <BAUM@BC.EDU> wrote:

> Anita wrote
> 
> When do you require residuals to be clustered in
> regressions? How do you go about doing it in Stata?
> 
> For example I run pooled OLS for biateral
> country-pair
> regression. Should I suspect residuals for i and j
> may
> be correlated..Or is it routine to assume such
> correlation in pooled estimations?
> 
> 
> The notion of cluster-robust standard errors is to
> allow each cluster  
> to have its own error variance, and within each
> cluster, the  
> assumption of independence of errors is relaxed. It
> would be very  
> sensibly applied to bilateral country-pair data if
> pooled OLS is  
> encountered.
> 
> However, with this sort of data (with which I have
> worked  
> extensively) you are making an assumption, in pooled
> OLS, that there  
> is no unobserved heterogeneity. If there are common
> elements to a  
> country-pair that might influence their errors over
> time, it is also  
> sensible that there might be a 'special
> relationship' between country- 
> pairs that might cause their relationship to differ
> from other  
> country-pairs. In other words fixed effects by
> country-pair might be  
> very sensible. If you create a country-pair
> indicator variable and - 
> xtreg, fe-, and the F-test at the foot of the model
> rejects its null,  
> it is saying that the pooled OLS model is delivering
> inconsistent  
> point estimates. This problem cannot be rectified by
> adjusting the  
> standard errors.
> 
> 
> 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
> 
> 
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