Heteroskedasticity-Robust Standard Errors for Fixed Effects Panel Data Regression

James H. Stock, Mark W. Watson

NBER Technical Working Paper No. 323
Issued in June 2006
NBER Program(s):   TWP

The conventional heteroskedasticity-robust (HR) variance matrix estimator for cross-sectional regression (with or without a degrees of freedom adjustment), applied to the fixed effects estimator for panel data with serially uncorrelated errors, is inconsistent if the number of time periods T is fixed (and greater than two) as the number of entities n increases. We provide a bias-adjusted HR estimator that is (nT)1/2 -consistent under any sequences (n, T) in which n and/or T increase to ∞.The conventional heteroskedasticity-robust (HR) variance matrix estimator for cross-sectional regression (with or without a degrees of freedom adjustment), applied to the fixed effects estimator for panel data with serially uncorrelated errors, is inconsistent if the number of time periods T is fixed (and greater than two) as the number of entities n increases. We provide a bias-adjusted HR estimator that is (nT)1/2 -consistent under any sequences (n, T) in which n and/or T increase to ∞.

(346 K)

Published: Stock, James H. and Mark W. Watson. "Heteroskedasticity-Robust Standard Errors for Fixed Effects Panel Data Regression." Econometrica 76, 1 (2008): 155-174.

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