Hi all,

I have a question regarding some clustering of standard errors. I read a great paper by M. A. Petersen: Estimating standard errors in finance panel data sets: comparing approaches. After reading this paper I found out that I need to double-cluster my standard errors in order to account for the, as in the paper called, unobserved firm effects and the time effect. The unobserved firm effect is serial correlation: of observation i, the SEs are correlated between t and t-1. The time effect is a cross sectional correlation: in a single year, the standard errors of multiple firms are correlated to one another.

through this paper, I found out that I should use the user-written reghdfe command. This would allow for double clustering of standard errors. I am, however, dumbfounded on one aspect. I need to absorb a categorical variable, just as in the areg command.




How would I go about this? I currently have the following command:

xtreg $ylist $h1 i.Quarter, cluster(busseccode) fe. the i.Quarter is there to control for some time-fixed effects ( if I am interpreting it correctly). It simply equals 1 if it is quarter 1, 2 if it is quarter 2 ... all the way until the last quarter in year 18: 64.

The busseccode is the TRBC business sector code. this contains 29 different sectors in which all the firms of my database are sectioned in.

I do not really have another categorical variable. I wanted to cluster my standard errors on the Quarter and busseccode. However, what categorical variable should I then absorb?




If someone is able to help me, I would seriously appreciate it.


I am, unfortunately, not allowed to share the data. If anyone needs more information on the data I can gladly give that, but I cannot give the raw data.