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Fixed-b asymptotics for panel models with two-way clustering

Author

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  • Chen, Kaicheng
  • Vogelsang, Timothy J.

Abstract

This paper studies a cluster robust variance estimator proposed by Chiang, Hansen and Sasaki (2024) for linear panels. First, we show algebraically that this variance estimator (CHS estimator, hereafter) is a linear combination of three common variance estimators: the one-way unit cluster estimator, the “HAC of averages” estimator, and the “average of HACs” estimator. Based on this finding, we obtain a fixed-b asymptotic result for the CHS estimator and corresponding test statistics as the cross-section and time sample sizes jointly go to infinity. Furthermore, we propose two simple bias-corrected versions of the variance estimator and derive the fixed-b limits. In a simulation study, we find that the two bias-corrected variance estimators along with fixed-b critical values provide improvements in finite sample coverage probabilities. We illustrate the impact of bias-correction and use of the fixed-b critical values on inference in an empirical example on the relationship between industry profitability and market concentration.

Suggested Citation

  • Chen, Kaicheng & Vogelsang, Timothy J., 2024. "Fixed-b asymptotics for panel models with two-way clustering," Journal of Econometrics, Elsevier, vol. 244(1).
  • Handle: RePEc:eee:econom:v:244:y:2024:i:1:s0304407624001763
    DOI: 10.1016/j.jeconom.2024.105831
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    References listed on IDEAS

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    More about this item

    Keywords

    Panel data; Clustering; Dependence; Standard errors; Fixed-b;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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