I should have added that the RE model is in fact a pooled regression with a specific covariance matrix structure. This is why the Stock-Watson problem does not arise here.
Eric
Eric de Souza
College of Europe
Brugge (Bruges), Belgium
http://www.coleurope.eu
-----Original Message-----
From: [email protected] [mailto:[email protected]] On Behalf Of DE SOUZA Eric
Sent: 19 August 2009 20:34
To: '[email protected]'
Subject: RE: st: Stata 11 Random Effects--Std. Errors
One would have to come up with a very particular error structure to allow for heteroscedasticity but not for serial correlation in the case when both the unobservable effect and the idiosyncratic error is absorbed by the residual.
I must admit that I have not looked at Stata's PA and MLE estimators. I am also not very happy (as a teacher) with the way Stata defines the fixed effects estimator. Why not use the conventional definition of deviations from the group mean?
Eric
Eric de Souza
College of Europe
Brugge (Bruges), Belgium
http://www.coleurope.eu
-----Original Message-----
From: [email protected] [mailto:[email protected]] On Behalf Of Schaffer, Mark E
Sent: 19 August 2009 20:20
To: [email protected]
Subject: RE: st: Stata 11 Random Effects--Std. Errors
This is different from the reason provided by Stock-Watson (2008) for FEs (see earlier in the thread).
Stock and Watson show that for the fixed effects estimator, the usual robust VCV - i.e., robust but not cluster-robust - is not consistent.
It's another example of the "incidental parameters" problem. This is why Stata 10 won't report it under any circumstances, including version control.
My suspicion was that this might carry over to the usual robust VCV for the random effects estimator and that this was why it was dropped in
Stata 11, but apparently not. Using cluster-robust with RE is
apparently just following standard practice in the literature.
If so, though, then I think I'd prefer to see non-cluster robust SEs available with the RE estimator through an option rather than version control.
--Mark (left scratching his head and wondering why robust and cluster robust are both kosher for the RE estimator, only cluster-robust is kosher for the FE estimator, Stata's PA estimator allows only robust but not cluster-robust, and Stata's MLE estimator allows neither)
> -----Original Message-----
> From: [email protected]
> [mailto:[email protected]] On Behalf Of DE SOUZA
> Eric
> Sent: 19 August 2009 18:37
> To: '[email protected]'
> Subject: RE: st: Stata 11 Random Effects--Std. Errors
>
> To add more detail:
> Two of the assumptions underlying the random effects model are that:
> 1. the unobservable effects are not correlated with the explanatory
> variables 2. the residuals have the random effects structure The
> second assumption is not required for consistency.
> Wooldridge's argument is: then why impose it. "With fixed T and large
> N asymptotics, we lose nothing in using robust standard errors and
> test statistics even if [the random effects error structure] holds".
>
> Eric
>
>
> Eric de Souza
> College of Europe
> Brugge (Bruges), Belgium
> http://www.coleurope.eu
>
> -----Original Message-----
> From: [email protected]
> [mailto:[email protected]] On Behalf Of David M.
> Drukker
> Sent: 19 August 2009 19:04
> To: [email protected]
> Subject: RE: st: Stata 11 Random Effects--Std. Errors
>
> Continuing the thread about why -xtreg .., re vce(robust)- changed its
> meaning between Stata 10 and Stata 11, Mark E Schaffer
> <[email protected]> asked for a citation.
>
> Wooldridge (2002, section 10.4.2) recommends the new approach of
> having
> -vce(robust)- mean -vce(cluster panelvar)-.
>
> When we first offered the -vce(robust)- and -vce(cluster
> clustvar)- on -xtreg, re-, we wanted to offer users the flexibility to
> use either estimator. We had Monte Carlo simulations showing that
> there are data generating processes for which -vce(robust)- performs
> quite well, so we allowed users to choose.
>
> Since we first offered these options, the literature has focused on
> always using -vce(cluster panelvar)- to obtain a "robust" estimator
> for -xtreg, re-. We made the change because the new method is what
> users now expect and it offers additional generality.
>
> David
> [email protected]
>
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>
--
Heriot-Watt University is a Scottish charity registered under charity number SC000278.
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