Testing for the appropriate level of clustering in linear regression models

DOI10.1016/J.JECONOM.2023.03.005MaRDI QIDQ6108339zbMATH OpenOpenAlexFDO

Authors James G. Mackinnon, Morten Ørregaard Nielsen, Matthew D. Webb

Publication date 29 June 2023

Published in Journal of Econometrics (Search for Journal in Brave)

Copyright license Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

Full work available at URL https://arxiv.org/abs/2301.04522

zbMATH Keywords

cluster-robust variance estimatorclustered dataCRVEgrouped datarobust inferencewild bootstrapwild cluster bootstrap

Mathematics Subject Classification ID

Statistics (62-XX) Game theory, economics, finance, and other social and behavioral sciences (91-XX)

Abstract: The overwhelming majority of empirical research that uses cluster-robust inference assumes that the clustering structure is known, even though there are often several possible ways in which a dataset could be clustered. We propose two tests for the correct level of clustering in regression models. One test focuses on inference about a single coefficient, and the other on inference about two or more coefficients. We provide both asymptotic and wild bootstrap implementations. The proposed tests work for a null hypothesis of either no clustering or ``fine clustering against alternatives of ``coarser clustering. We also propose a sequential testing procedure to determine the appropriate level of clustering. Simulations suggest that the bootstrap tests perform very well under the null hypothesis and can have excellent power. An empirical example suggests that using the tests leads to sensible inferences.

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Cited in

(2)

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