Economics at your fingertips  

A Simple and Trustworthy Asymptotic t Test in Difference-in-Differences Regressions

Cheng Liu and Yixiao Sun ()

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: We propose an asymptotically valid t test that uses Student's t distribution as the reference distribution in a difference-in-differences regression. For the asymptotic variance estimation, we adopt the clustering-by-time approach to accommodate cross-sectional dependence. This approach often assumes the clusters to be independent across time, but we allow them to be temporally dependent. The proposed t test is based on a special heteroscedasticity and autocorrelation robust (HAR) variance estimator. We target the type I and type II errors and develop a testing-oriented method to select the underlying smoothing parameter. By capturing the estimation uncertainty of the HAR variance estimator, the t test has more accurate size than the corresponding normal test and is just as powerful as the latter. Compared to the nonstandard test developed in the literature, the standard t test is just as accurate but much more convenient to use. Model-based and empirical-data-based Monte Carlo simulations show that the t test works quite well in finite samples.

Keywords: Social and Behavioral Sciences; Basis Functions; Difference-in-Differences; Fixed-smoothing Asymptotics; Heteroscedasticity and Autocorrelation Robust; Student's t distribution; t test (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2019-03-12
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link);origin=repeccitec (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().

Page updated 2019-06-25
Handle: RePEc:cdl:ucsdec:qt0ck2109g