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st: RE: clustered standard errors


From   "Schaffer, Mark E" <M.E.Schaffer@hw.ac.uk>
To   <statalist@hsphsun2.harvard.edu>
Subject   st: RE: clustered standard errors
Date   Thu, 29 Apr 2010 11:03:46 +0100

Robert,

> -----Original Message-----
> From: owner-statalist@hsphsun2.harvard.edu 
> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of 
> Robert Lineira
> Sent: 29 April 2010 10:08
> To: statalist@hsphsun2.harvard.edu
> Subject: st: clustered standard errors
> 
> Dear all,
> 
> I found on the net a presentation by Austin Nichols and Mark 
> Schaffer on the net on clustered standard errors. After 
> reading it, some questions emerged to me on how to use them.
> 
> I want to run an analysis using a pool of 17 survey samples.
> Supposedly, standard errors will be correlated within the 
> clusters, but the presentation advises that to use clustered 
> standard error might be a very bad solution. They suggest to 
> perform some test before using the corrected errors running 
> 'cltest' and 'xtcltest' stata commands.
> Unfortunately, I just found 'cltest' command, I am not sure 
> is the same they use given that is previous to the Kédzi
> (2007) paper they quote.

No, that's a different test.  The test code Austin and I referred to in our presentation is still languishing in alpha testing.

But I'm not sure it or other tests can help you.

The problem is that this test, like White's general heteroskedasticity test and related tests, works via a vector-of-contrasts.  The contrast is between the elements of the robust and non-robust VCVs.

Under the null, the robust VCV is consistent.  If the non-robust VCV is also consistent, its elements will be similar to those of the robust VCV, and the vector of contrasts will be small.  If the non-robust VCV is inconsistent, the contrast will be large.

You can see the problem now.  To do this or a related test in your application, you need a robust VCV that is consistent.  Your cluster-robust VCV is indeed consistent, but with only 17 clusters, you are not very far along the way to infinity, and it's likely to be a poor estimator of the VCV.  Contrasting it with the non-robust VCV is not going to give you a reliable test - the contrast could be big because the cluster-robust VCV is poor, for example.

Hope this helps.

Cheers,
Mark

> My question is if anyone knows a test which I could use 
> before applying clustered standard errors and (if not) which 
> solution do you find better in a case such as this.
> 
> Regards
> 
> Robert.
> 
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