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RE: 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   RE: Heteroskedasticity and fixed effects (was: st: RE: Re: Weak instruments)
Date   Thu, 17 Jul 2008 13:01:41 +0100

Alice,

> -----Original Message-----
> From: owner-statalist@hsphsun2.harvard.edu 
> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of aapdm
> Sent: 17 July 2008 12:13
> To: statalist@hsphsun2.harvard.edu
> Subject: Re: Heteroskedasticity and fixed effects (was: st: 
> RE: Re: Weak instruments)
> 
> Dear Mark,
> 
> Many thanks for this.
> 
> It seems to me that Stata 10 now adjusts standard errors 
> according to the paper by Stock and Watson.

No, that's not quite right.  If you check -help whatsnew-, you'll see in
the "update 25feb2008" section:

20.  xtreg, fe now uses vce(cluster id) when vce(robust) is specified,
in light of the new
     results in Stock and Watson, "Heteroskedasticity-robust standard
errors for fixed-effects
     panel-data regression," Econometrica 76 (2008): 155-174.

In other words, if you specify "robust" you get "cluster robust", not
"Stock-Watson-robust".  This is easy to confirm - just run the model
with the -robust- option and again with the -cluster-, and you'll see
you get the same results.

> Actually the standard errors reported after xtreg,fe are 
> different between Stata 9 and Stata 10.
>
> However to know whether I should adjust standard errors for 
> heteroskedasticity (for instance using cluster, as you 
> suggest) I would first of all test whether there is evidence 
> of heteroskedasticity or not.
> 
> I was wondering which test or command I should be using. I 
> found the xttest3 that can be used after xtreg, or whitetst after reg.

-whitetst- (or, pardon the self-plug, -ivhettest-) after -regress- with
fixed effects inserts as dummies by hand probably won't be appropriate,
for the reason I gave in my previous email.




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