Review of Financial Studies · 2013 · 1.1K citations · 29 references
BusinessEconomicsFinanceAsset PricingCorporate FinanceEconometricsAsset Pricing EmpiricsCapital Asset Pricing ModelFixed-effect ModelsHeterogeneity AssessmentMicroeconometricsTreatment EffectsFixed Effects RegressionFixed Effects SpecificationFixed-effect EstimatorsHeterogeneityIndividual Fixed EffectsUnobserved ConfoundingUnobserved HeterogeneityWithin-group Estimation
Controlling for unobserved heterogeneity (or “common errors”), such as industry-specific shocks, is a fundamental challenge in empirical research.This paper discusses the limitations of two approaches widely used in corporate finance and asset pricing research: demeaning the dependent variable with respect to the group (e.g., “industry-adjusting”) and adding the mean of the group's dependent variable as a control. We show that these methods produce inconsistent estimates and can distort inference. In contrast, the fixed effects estimator is consistent and should be used instead. We also explain how to estimate the fixed effects model when traditional methods are computationally infeasible.
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Measuring Mutual Fund Performance with Characteristic‐Based Benchmarks
Kent Daniel, Mark Grinblatt, Sheridan Titman et al. · The Journal of Finance · 1997 · 3.1K citations
Panel data and unobservable individual effects
JerryA. Hausman, WilliamE. Taylor · Journal of Econometrics · 1981 · 2.4K citations · Full text