Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches

In corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms or across time, and OLS standard errors can be biased. Historically, researchers in the two literatures have used different soluti...

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Bibliographic Details
Published in:The Review of financial studies 2009-01, Vol.22 (1), p.435-480
Main Author: Petersen, Mitchell A.
Format: Article
Language:English
Subjects:
Autocorrelation
Bias
Coefficients
Corporate finance
Correlations
Datasets
Errors
Estimates
Estimating techniques
Estimation
Estimation bias
Estimation methods
Financial economics
Least squares method
Mathematical independent variables
Mathematical models
Methods
Panel data
Researchers
Standard deviation
Standard error
Statistical variance
Studies
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Summary:In corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms or across time, and OLS standard errors can be biased. Historically, researchers in the two literatures have used different solutions to this problem. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhn053