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Re: st: fixed effect correcting auto correlation and heteroskedasticity


From   Gordon Hughes <[email protected]>
To   [email protected]
Subject   Re: st: fixed effect correcting auto correlation and heteroskedasticity
Date   Tue, 01 Mar 2011 23:18:57 +0000

The routine -xtscc- is an implementation of the Driscoll-Kraay robust covariance estimator, but it primarily intended to be robust with respect to spatial or similar correlation between cross-section units. It is basically a Newey-West type estimator with respect to time. You should read Hoechle's article on -xtscc- in Stata Journal referred to in the help information for the program. You can also refer to the original Driscoll & Kraay article in Review of Economics & Statistics 1998. A couple of points:

1. From your description I don't think that you have enough time periods for any adjustment for serial correlation to be relied upon. However, this is a little complicated because of the way in which -xtscc- operates. In effect it applies a Newey-West estimator to a time sequence of cross-section averages, so it depends upon precisely how unbalanced your panel is, but if you have a maximum of 12 periods (for T) you really aren't going to get very much value out of using it.

2. The default specification for -xtscc- is random effects. There is a fixed effects option - again, read the help file.

3. Since the real point of -xtscc- is cross-sectional spatial correlation, which does not appear relevant, you could consider -newey2- which is another user-written procedure which implements the Newey-West estimator for panel data (among other things).

4. Given the fact that you have (relatively) large N and small T, why not bootstrap the estimation of the covariance matrix (using panel units as the population to be re-sampled)?

Gordon Hughes
[email protected]

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