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Heteroskedasticity and fixed effects (was: st: RE: Re: Weak instruments)


From   "Schaffer, Mark E" <M.E.Schaffer@hw.ac.uk>
To   <statalist@hsphsun2.harvard.edu>
Subject   Heteroskedasticity and fixed effects (was: st: RE: Re: Weak instruments)
Date   Thu, 17 Jul 2008 00:00:16 +0100

Alice,

> -----Original Message-----
> From: owner-statalist@hsphsun2.harvard.edu 
> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of aapdm
> Sent: 16 July 2008 23:34
> To: statalist@hsphsun2.harvard.edu
> Subject: Re: st: RE: Re: Weak instruments
> 
> Hi
> 
> My apologies if this email gets there twice but I think I 
> lost the one I wrote before.
> 
> I am using xtreg, fe and would like to test for 
> heteroskedasticity after the estimation.
> 
> Can someone tell me how to do that? Also, if I add the robust 
> command after xtreg, I would expect not to be able to reject 
> the null of homoskedasticity (for instance when using reg, fe 
> and including the dummies) but this is not the case: if I use 
> xttest3, I can't reject the null whether I add robust or not 
> after the estimation.

A few thoughts here...

- You should put a new title in the subject field when starting a new
thread.  It misleads readers of the list and messes up threading if you
don't.

- You probably don't want to use -robust- with -xtreg,fe-.  Stock and
Watson 2007 (see their NBER paper - http://www.nber.org/papers/t0323)
show that the standard robust var-cov matrix is inconsistent.  In other
words, the SEs are wrong.  They recommend either a modified vcv (which
isn't implemented by -xtreg- the last I checked) or using the
cluster-robust vcv.  The latter is easy to do and will get you SEs that
are robust to clustering as well as heteroskedasticity.

- The standard White/Koenker/Breusch-Pagan/Godfrey/Cook-Weisberg tests
for heteroskedasticity (which is what you probably had in mind for
testing) will probably also be inconsistent after fixed effects
estimation, for the same reason that the robust vcv is inconsistent.  At
their heart, they are contrasting the robust vcv with the classical
(assumed homoskedasticity) vcv.  Under the null of no
heteroskedasticity, there shouldn't be much difference.  But if the
robust vcv is inconsistent, it's easy to see that you could reject the
null even if you have homoskedasticity.

Bottom line: the easiest thing to do is to switch to using -cluster-
after -xtreg,fe- (or after -xtivreg2,fe-, if you'll pardon the
self-plug).

Hope this helps.

Cheers,
Mark

Prof. Mark Schaffer
Director, CERT
Department of Economics
School of Management & Languages
Heriot-Watt University
Edinburgh EH14 4AS
tel +44-131-451-3494 / fax +44-131-451-3296
http://ideas.repec.org/e/psc51.html

> Can someone help me?
> 
> Many thanks. Alice.
> 
> 
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