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Simple Formulas for Standard Errors that Cluster by Both Firm and Time

25 Pages Posted: 13 Jul 2006 Last revised: 18 May 2009

Samuel Brodsky Thompson

Arrowstreet Capital, L.P.

Date Written: May 12, 2009

Abstract

When estimating finance panel regressions, it is common practice to adjust standard errors for correlation either across firms or across time. These procedures are valid only if the residuals are correlated either across time or across firms, but not across both. This note shows that it is very easy to calculate standard errors that are robust to simultaneous correlation across both firms and time. The covariance estimator is equal to the estimator that clusters by firm, plus the the estimator that clusters by time, minus the usual heteroskedasticity-robust OLS covariance matrix. Any statistical package with a clustering command can be used to easily calculate these standard errors.

Keywords: cluster standard errors, panel data, finance panel data

JEL Classification: C23, G30, G12

Suggested Citation

Thompson, Samuel Brodsky, Simple Formulas for Standard Errors that Cluster by Both Firm and Time (May 12, 2009). Available at SSRN: https://ssrn.com/abstract=914002 or http://dx.doi.org/10.2139/ssrn.914002

Samuel Brodsky Thompson (Contact Author)

Arrowstreet Capital, L.P. ( email )

44 Brattle St., 5th Floor
Cambridge, MA 02138
United States
617 349 2254 (Phone)

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