T-Statistic Based Correlation and Heterogeneity Robust Inference
45 Pages Posted: 21 Feb 2007
Date Written: February 2007
We develop a general approach to robust inference about a scalar parameter when the data is potentially heterogeneous and correlated in a largely unknown way. The key ingredient is the following result of Bakirov and Sz´ekely (2005) concerning the small sample properties of the standard t-test: For a significance level of 5% or lower, the t-test remains conservative for underlying observations that are independent and Gaussian with heterogenous variances. One might thus conduct robust large sample inference as follows: partition the data into q ≥ 2 groups, estimate the model for each group and conduct a standard t-test with the resulting q parameter estimators. This results in valid inference as long as the groups are chosen in a way that ensures the parameter estimators to be asymptotically independent, unbiased and Gaussian of possibly different variances. We provide examples of how to apply this approach to time series, panel, clustered and spatially correlated data.
Keywords: t-test, dependence, least favorable distribution, variance estimation, Fama-MacBeth method
JEL Classification: C32
Suggested Citation: Suggested Citation