Robust difference-in-differences analysis when there is a term structure

Kjell Nyborg and Jiri Woschitz
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Jiri Woschitz: BI Norwegian Business School

No 24-03, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Difference-in-differences (DiD) analysis is commonly used to study fixed-income pricing. Using simulations, we show that the standard DiD approach applied to variables with a term structure systematically produces false and mismeasured treatment effects, even under random treatment assignment. Standard DiD is misspecified because of endemic heterogeneity over the maturity spectrum and non-matched treated and control-bond samples. Neither bond fixed effects nor standard term-structure controls resolve the problem. We provide solutions using term-structure modeling that allow for heterogeneous effects over the maturity spectrum. These issues are not unique to DiD analysis, but are generic to group-assignment settings.

Keywords: Fixed-income pricing; yield curve; term structure; difference-in-differences analysis; false and mismeasured treatment effects (search for similar items in EconPapers)
JEL-codes: C20 E43 E47 G12 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2024-01
New Economics Papers: this item is included in nep-ecm and nep-ifn
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Working Paper: Robust difference-in-differences analysis when there is a term structure (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2403

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