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Re: st: Petersen (2009) vs Thompson (2011) - Estimating standard errors in panel data sets


From   "Roger B. Newson" <r.newson@imperial.ac.uk>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: Petersen (2009) vs Thompson (2011) - Estimating standard errors in panel data sets
Date   Tue, 04 Dec 2012 20:16:05 +0000

It is probably a good idea here to give the references in full, ie with the journal title, volume and pages. Otherwise, very few of us will know which paper you are referring to.

Best wishes

Roger

Roger B Newson BSc MSc DPhil
Lecturer in Medical Statistics
Respiratory Epidemiology and Public Health Group
National Heart and Lung Institute
Imperial College London
Royal Brompton Campus
Room 33, Emmanuel Kaye Building
1B Manresa Road
London SW3 6LR
UNITED KINGDOM
Tel: +44 (0)20 7352 8121 ext 3381
Fax: +44 (0)20 7351 8322
Email: r.newson@imperial.ac.uk
Web page: http://www.imperial.ac.uk/nhli/r.newson/
Departmental Web page:
http://www1.imperial.ac.uk/medicine/about/divisions/nhli/respiration/popgenetics/reph/

Opinions expressed are those of the author, not of the institution.

On 04/12/2012 17:45, Julia Ke wrote:
Dear Statalist,

I am running a panel regression. It is a rather small sample with multiple firms and a few years.

I was reading into which method to use, which came down to the following: If one dimension has far more units than the other, clustering on one dimension and using dummies on the other seems to be used (especially in smaller panels).

My question concerns which unit to cluster and which one to use dummies on. The below two authors seem to state the opposite which is confusing me a bit...

Petersen (2009): "Since most panel data sets have more firms than years, the most common approach is to include dummy variables each year (to absorb the time effect) and then cluster by firm."
"When there are only a few clusters in one dimension, clustering by the more frequent cluster yields results that are almost identical to clustering by both firm and time."

Thompson (2011): If there are far more firms than time periods, clustering by time eliminates most of the bias unless within-firm correlations are much larger than within-time period correlations.

Many thanks in advance,
Julia



Papers mentioned:
Petersen (2009), "Estimating Standard Errors in Finance Panel Data Sets"
Thompson (2011), "Simple Formulas for Standard Errors that Cluster by Both Firm and Time"
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