SMU SOE Seminar (August 4, 2022):Standard Errors for Two-Way Clustering with Serially Correlated Time Effects

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ABSTRACT We propose improved standard errors and an asymptotic distribution theory for two-way clustered panels. Our proposed estimator and theory allow for arbitrary serial dependence in the common time effects, which is excluded by existing two-way methods, including the popular twoway cluster standard errors of Cameron, Gelbach, and Miller (2011) and the cluster bootstrap of Menzel (2021). Our asymptotic distribution theory is the first which allows for this level of interdependence among the observations. Under weak regularity conditions, we demonstrate that the least squares estimator is asymptotically normal, our proposed variance estimator is consistent, and t-ratios are asymptotically standard normal, permitting conventional inference. We present simulation evidence that confidence intervals constructed with our proposed standard errors obtain superior coverage performance relative to existing methods. We illustrate the relevance of the proposed method in an empirical application to a standard Fama-French three-factor regression. Keywords: panel data, serial correlation, standard errors, two-way clustering. Click here to view the paper. Click here to view the CV.
		PRESENTER Harold Chiang University of Wisconsin-Madison
		RESEARCH FIELDS Econometric theory and practice
		DATE: 4 August 2022 (Thursday)
		TIME: 1pm - 2.30pm
		VENUE: Interactive Learning Room School of Economics Level 5 Singapore Management University 90 Stamford Road Singapore 178903