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Re: st: Clustering Standard Errors.


From   Austin Nichols <austinnichols@gmail.com>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: Clustering Standard Errors.
Date   Mon, 14 Jun 2010 17:25:19 -0400

Nils Braakmann <nilsbraakmann@googlemail.com> :
No, not the same. The group() approach uses a much more restrictive
assumption about independence of errors, and that VCE is actually an
ingredient of the two-way cluster-robust VCE.  Quoting from
http://fmwww.bc.edu/repec/bocode/i/ivreg2.html :

The two-way clustered variance-covariance estimator is
calculated using 3 different VCEs: one clustered on varname1, the second
clustered on varname2, and the third clustered on the intersection of varname1
and varname2.  Cameron et al. (2006, pp. 8-9) discuss two possible small-sample
adjustments using the number of clusters in each category.  cgmreg uses one
method (adjusting the 3 VCEs separately based on the number of clusters in the
categories VCE clusters on); ivreg2 uses the second (adjusting the final 2-way
cluster-robust VCE using the smaller of the two numbers of clusters).

Whether or not you should use one approach or another depends on many
things, including your own most plausible theories about independence
of errors and the number of clusters in each dimension; see
http://www.stata.com/meeting/boston10/abstracts.html#baum

On Mon, Jun 14, 2010 at 3:19 PM, Nils Braakmann
<nilsbraakmann@googlemail.com> wrote:
> Hi Natasha,
>
> I guess the two approaches should give identical results (although I'm
> not sure how two-way clustering is implemented in e.g. xtivreg2). The
> -egen ... group()- approach essentially creates all possible
> combinations of (in your case) industry and region and clusters on
> that. In my understanding, two way clustering should do the same.
>
> Best,
> Nils
>
> On Mon, Jun 14, 2010 at 4:50 PM, natasha agarwal
> <agarwana2@googlemail.com> wrote:
>> Thanks Nils.
>>
>> How would you know whether you need to do two-way clustering or
>> generate a cluster variable?
>>
>> Thanks
>> Natasha
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