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Evaluating one-way and two-way cluster-robust covariance matrix estimates

Author

Listed:
  • Christopher F Baum

    (Boston College
    DIW Berlin)

  • Austin Nichols

    (Urban Institute)

  • Mark E Schaffer

    (Heriot-Watt University
    CEPR)

Abstract

In this presentation, I update Nichols and Schaffer's 2007 UK Stata Users Group talk on clustered standard errors. Although cluster-robust standard errors are now recognized as essential in a panel-data context, official Stata only supports clusters that are nested within panels. This requirement rules out the possibility of defining clusters in the time dimension and modeling contemporaneous dependence of panel units' error processes. I build upon recent analytical developments that define two-way (and conceptually, n-way) clustering and upon the 2010 implementation of two-way clustering in the widely used ivreg2 and xtivreg2 packages. I present examples of the utility of one-way and two-way clustering using Monte Carlo techniques, I present a comparison with alternative approaches to modeling error dependence, and I consider tests for clustering of errors.

Suggested Citation

  • Christopher F Baum & Austin Nichols & Mark E Schaffer, 2010. "Evaluating one-way and two-way cluster-robust covariance matrix estimates," United Kingdom Stata Users' Group Meetings 2010 12, Stata Users Group.
    • Handle: RePEc:boc:usug10:12
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    3. Silvia Sacchetti & Ermanno C. Tortia, 2012. "A �Human Growth� Perspective on Organizational Resources and Firm Performance," Department of Economics Working Papers 1209, Department of Economics, University of Trento, Italia.
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    5. Silvia Sacchetti & Ermanno C. Tortia, 2014. "A human growth perspective on organizational resources, worker satisfaction and firm performance," Euricse Working Papers 1466, Euricse (European Research Institute on Cooperative and Social Enterprises).
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    7. Guillermo Baquero & Malika Hamadi & Andréas Heinen, 2012. "Competition, loan rates and information dispersion in microcredit markets," ESMT Research Working Papers ESMT-12-02, ESMT European School of Management and Technology.
    8. Abebe, Gumataw K. & Bijman, Jos & Kemp, Ron & Omta, Onno & Tsegaye, Admasu, 2013. "Contract farming configuration: Smallholders’ preferences for contract design attributes," Food Policy, Elsevier, vol. 40(C), pages 14-24.
    9. Mauer, David C. & Wang, Song & Wang, Xiao & Zhang, Yilei, 2015. "Global diversification and IPO returns," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 436-456.
    10. Henson, James, 2014. "The Survival of Nonprofits in the United States," MPRA Paper 59494, University Library of Munich, Germany.
    11. Clougherty, Joseph A. & Zhang, Nan, 2023. "Antitrust policy and inward FDI: The impact of policy risk and uncertainty on U.S. inward-FDI flows," International Business Review, Elsevier, vol. 32(4).

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