On standarderrors
Laurent Berge
20230908
Source:vignettes/standard_errors.Rmd
standard_errors.Rmd
It is an euphemism to say that standarderrors are a critical element of your estimations: literally your paper’s results depend on them. It is therefore unfortunate that no conventional “best” way exists to compute them.
For example, when performing the exact same estimation across various software, it is not uncommon to obtain different standarderrors. If your first thought is: there must be a bug… well, put that thought aside because there ain’t no bug. It often boils down to the choices the developer made regarding small sample correction which, maybe surprisingly, has many degrees of freedom when it comes to implementation.
Multiple definitions can create confusion and the purpose of this document is to lay bare the fiddly details of standarderror computation in this package.
The first part of this vignette describes how standarderrors are
computed in fixest
’s estimations. In particular, it details
all the possible choices surrounding small sample correction. Please
note that here I don’t discuss the why, but only the
how. For a thorough introduction to the topic, see the
excellent paper by Zeileis,
Koll and Graham (2020). The second part illustrates how to replicate
some standarderrors obtained from other estimation methods with
fixest
.
This document applies to fixest
version 0.10.0 or
higher.
How standarderrors are computed in fixest
There are two components defining the standarderrors in
fixest
. The main type of standarderror is given by the
argument vcov
, the small sample correction is defined by
the argument ssc
.
Here’s an example, the explanations follow in the next two sections:
library(fixest)
data(trade)
# OLS estimation
gravity = feols(log(Euros) ~ log(dist_km)  Destination + Origin + Product + Year, trade)
# Twoway clustered SEs
summary(gravity, vcov = "twoway")
#> OLS estimation, Dep. Var.: log(Euros)
#> Observations: 38,325
#> Fixedeffects: Destination: 15, Origin: 15, Product: 20, Year: 10
#> Standarderrors: Clustered (Destination & Origin)
#> Estimate Std. Error t value Pr(>t)
#> log(dist_km) 2.16988 0.171367 12.6621 4.6802e09 ***
#> 
#> Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
#> RMSE: 1.74337 Adj. R2: 0.705139
#> Within R2: 0.219322
# Twoway clustered SEs, without small sample correction
summary(gravity, vcov = "twoway", ssc = ssc(adj = FALSE, cluster.adj = FALSE))
#> OLS estimation, Dep. Var.: log(Euros)
#> Observations: 38,325
#> Fixedeffects: Destination: 15, Origin: 15, Product: 20, Year: 10
#> Standarderrors: Clustered (Destination & Origin)
#> Estimate Std. Error t value Pr(>t)
#> log(dist_km) 2.16988 0.165494 13.1115 2.9764e09 ***
#> 
#> Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
#> RMSE: 1.74337 Adj. R2: 0.705139
#> Within R2: 0.219322
The argument vcov
The argument vcov
can be equal to either:
"iid"
, "hetero"
, "cluster"
,
"twoway"
, "NW"
, "DK"
, or
"conley"
.
If vcov = "iid"
, then the standarderrors are based on
the assumption that the errors are non correlated and homoskedastic. If
vcov = "hetero"
, this corresponds to the classic
hereoskedasticityrobust standarderrors (White correction), where it is
assumed that the errors are non correlated but the variance of their
generative law may vary.
If vcov = "cluster"
, then arbitrary correlation of the
errors within clusters is accounted for. Same for
vcov = "twoway"
: arbitrary correlation within each of the
two clusters is accounted for.
In the context of panel data or time series, vcov = "NW"
(NeweyWest, 1987) or vcov = "DK"
(DriscollKraay, 1998)
account for temporal correlation between the errors; the two differing
on how to account for heterogeneity between units. Their implementation
is based on Millo (2017).
Finally, vcov = "conley"
accounts for spatial
correlation of the errors.
The argument ssc
The type of small sample correction applied is defined by the
argument ssc
which accepts only objects produced by the
function ssc
. The main arguments of this function are
adj
, fixef.K
and cluster.adj
. I
detail each of them below.
Say you have \(\tilde{V}\) the
variancecovariance matrix (henceforth VCOV) before any small sample
adjustment. Argument adj
can be equal to TRUE
or FALSE
, leading to the following adjustment:
When the estimation contains fixedeffects, the value of \(K\) in the previous adjustment can be
determined in different ways, governed by the argument
fixef.K
. To illustrate how \(K\) is computed, let’s use an example with
individual (variable id
) and time fixedeffect and with
clustered standarderrors. The structure of the 10 observations data
is:
The standarderrors are clustered with respect to the
cluster
variable, further we can see that the variable
id
is nested within the cluster
variable
(i.e. each value of id
“belongs” to only one value of
cluster
; e.g. id
could represent US counties
and cluster
US states).
The argument fixef.K
can be equal to either
"none"
, "nested"
or "full"
. Then
\(K\) will be computed as follows:
Where \(K_{vars}\) is the number of
estimated coefficients associated to the variables.
fixef.K="none"
discards all fixedeffects coefficients.
fixef.K="nested"
discards all coefficients that are nested
(here the 5 coefficients from id
). Finally
fixef.K="full"
accounts for all fixedeffects coefficients
(here 6: equal to 5 from id
, plus 2 from time
,
minus one used as a reference [otherwise collinearity arise]). Note that
if fixef.K="nested"
and the standarderrors are
not clustered, this is equivalent to using
fixef.K="full".
The last argument of ssc
is cluster.adj
.
This argument is only relevant when the standarderrors are clustered or
when they are corrected for serial correlation (NeweyWest or
DriscollKraay). Let \(M\) be the
sandwich estimator of the VCOV without adjustment. Then for oneway
clustered standard errors:
With \(G\) the number of unique
elements of the cluster variable (in the previous example \(G=2\) for cluster
).
The effect of the adjustment for twoway clustered standarderrors is as follows:
Using the data from the previous example, here the standarderrors
are clustered by id
and time
, leading to \(G_{id}=5\), \(G_{time}=2\), and \(G_{id,time}=10\).
When standarderrors are corrected for serial correlation, the corresponding adjustment applied is \(G_{time} / (G_{time}  1)\).
Yet more details
You’re already fed up about about these details? I’m sorry but
there’s more, so far you’ve only seen the main arguments! I now come to
detail three more elements: fixef.force_exact
,
cluster.df
and t.df
.
Argument fixef.force_exact
is only relevant when there
are two or more fixedeffects. By default all the fixedeffects
coefficients are accounted for when computing the degrees of freedom. In
general this is fine, but in some situations it may overestimate the
number of estimated coefficients. Why? Because some of the fixedeffects
may be collinear, the effective number of coefficients being lower.
Let’s illustrate that with an example. Consider the following set of
fixedeffects:
There are 6 different values of id
and 4 different
values of time
. By default, 9 coefficients are used to
compute the degrees of freedom (6 plus 4 minus one reference). But we
can see here that the “effective” number of coefficients is equal to 8:
two coefficients should be removed to avoid collinearity issues (any one
from each color set). If you use fixef.force_exact=TRUE
,
then the function fixef
is first run to determine the
number of free coefficients in the fixedeffects, this number is then
used to compute the degree of freedom.
Argument cluster.df
is only relevant when you apply
twoway clustering (or higher). It can have two values: either
"conventional"
, or "min"
(the default). This
affects the adjustments for each clustered matrix. The
"conventional"
way to make the adjustment has already been
described in the previous equation. If cluster.df="min"
(again, the default), and for twoway clustered standard errors, the
adjustment becomes:
Now instead of having a specific adjustment for each matrix, there is only one adjustment of \(G_{min}/(G_{min}1)\) where \(G_{min}\) is the minimum cluster size (here \(G_{min}=\min(G_{id},G_{time})\)).
Argument t.df
is only relevant when standarderrors are
clustered. It affects the way the pvalue and confidence
intervals are computed. It can be equal to: either
"conventional"
, or "min"
(the default). By
default, when standarderrors are clustered, the degrees of freedom used
in the Student t distribution is equal to the minimum cluster size
(among all clusters used to cluster the VCOV) minus one. If
t.df="conventional"
, the degrees of freedom used to find
the pvalue from the Student t distribution is equal to the number of
observations minus the number of estimated coefficients.
Replicating standarderrors from other methods
This section illustrates how the results from fixest
compares with the ones from other methods. It also shows how to
replicate the latter from fixest
.
The data set and heteroskedasticityrobust SEs
Using the Grunfeld data set from the plm
package, here
are some comparisons when the estimation doesn’t contain
fixedeffects.
library(sandwich)
library(plm)
data(Grunfeld)
# Estimations
res_lm = lm(inv ~ capital, Grunfeld)
res_feols = feols(inv ~ capital, Grunfeld)
# Same standarderrors
rbind(se(res_lm), se(res_feols))
#> (Intercept) capital
#> [1,] 15.63927 0.0383394
#> [2,] 15.63927 0.0383394
# Heteroskedasticityrobust covariance
se_lm_hc = sqrt(diag(vcovHC(res_lm, type = "HC1")))
se_feols_hc = se(res_feols, vcov = "hetero")
rbind(se_lm_hc, se_feols_hc)
#> (Intercept) capital
#> se_lm_hc 17.05558 0.06633144
#> se_feols_hc 17.05558 0.06633144
Note that Stata’s reg inv capital, robust
also leads to
similar results (same SEs, same pvalues).
“IID” SEs in the presence of fixedeffects
The most important differences arise in the presence of
fixedeffects. Let’s first compare “iid” standarderrors between
lm
and plm
.
# Estimations
est_lm = lm(inv ~ capital + as.factor(firm) + as.factor(year), Grunfeld)
est_plm = plm(inv ~ capital + as.factor(year), Grunfeld, index = c("firm", "year"), model = "within")
# we use panel.id so that panel VCOVs can be applied directly
est_feols = feols(inv ~ capital  firm + year, Grunfeld, panel.id = ~firm + year)
#
# "iid" standarderrors
#
# By default fixest clusters the SEs when FEs are present,
# so we need to ask for iid SEs explicitly.
rbind(se(est_lm)["capital"], se(est_plm)["capital"], se(est_feols, vcov = "iid"))
#> capital
#> [1,] 0.02597821
#> [2,] 0.02597821
#> [3,] 0.02597821
# pvalues:
rbind(pvalue(est_lm)["capital"], pvalue(est_plm)["capital"], pvalue(est_feols, vcov = "iid"))
#> capital
#> [1,] 1.519204e35
#> [2,] 1.519204e35
#> [3,] 1.519204e35
The standarderrors and pvalues are identical, note that this is
also the case for Stata’s xtreg
.
Clustered SEs
Now for clustered SEs:
# Clustered by firm
se_lm_firm = se(vcovCL(est_lm, cluster = ~firm, type = "HC1"))["capital"]
se_plm_firm = se(vcovHC(est_plm, cluster = "group"))["capital"]
se_stata_firm = 0.06328129 # vce(cluster firm)
se_feols_firm = se(est_feols) # By default: clustered according to firm
rbind(se_lm_firm, se_plm_firm, se_stata_firm, se_feols_firm)
#> capital
#> se_lm_firm 0.06493478
#> se_plm_firm 0.05693726
#> se_stata_firm 0.06328129
#> se_feols_firm 0.06328129
As we can see, there are three different versions of the
standarderrors, feols
being identical to Stata’s
xtreg
clustered SEs. By default, the pvalue is
also identical to the one from Stata (from fixest
version
0.7.0 onwards).
Now let’s see how to replicate the standarderrors from
lm
and plm
:
# How to get the lm version
se_feols_firm_lm = se(est_feols, ssc = ssc(fixef.K = "full"))
rbind(se_lm_firm, se_feols_firm_lm)
#> capital
#> se_lm_firm 0.06493478
#> se_feols_firm_lm 0.06493478
# How to get the plm version
se_feols_firm_plm = se(est_feols, ssc = ssc(fixef.K = "none", cluster.adj = FALSE))
rbind(se_plm_firm, se_feols_firm_plm)
#> capital
#> se_plm_firm 0.05693726
#> se_feols_firm_plm 0.05693726
HAC SEs
And finally let’s look at NeweyWest and DriscollKray standarderrors:
#
# Neweywest
#
se_plm_NW = se(vcovNW(est_plm))["capital"]
se_feols_NW = se(est_feols, vcov = "NW")
rbind(se_plm_NW, se_feols_NW)
#> capital
#> se_plm_NW 0.08390222
#> se_feols_NW 0.08629896
# we can replicate plm's by changing the type of SSC:
rbind(se_plm_NW,
se(est_feols, vcov = NW ~ ssc(adj = FALSE, cluster.adj = FALSE)))
#> capital
#> se_plm_NW 0.08390222
#> 0.08390222
#
# DriscollKraay
#
se_plm_DK = se(vcovSCC(est_plm))["capital"]
se_feols_DK = se(est_feols, vcov = "DK")
rbind(se_plm_DK, se_feols_DK)
#> capital
#> se_plm_DK 0.08359734
#> se_feols_DK 0.08800884
# Replicating plm's
rbind(se_plm_DK,
se(est_feols, vcov = DK ~ ssc(adj = FALSE, cluster.adj = FALSE)))
#> capital
#> se_plm_DK 0.08359734
#> 0.08359734
As we can see, the type of small sample correction we choose can have a nonnegligible impact on the standarderror.
Other multiple fixedeffects methods
Now a specific comparison with lfe
(version 2.87) and
Stata’s reghdfe
which are popular tools to estimate
econometric models with multiple fixedeffects.
From fixest
version 0.7.0 onwards, the standarderrors
and pvalues are computed similarly to reghdfe
, for both
clustered and multiway clustered standard errors. So the comparison here
focuses on lfe
.
Here are the differences and similarities with lfe
:
library(lfe)
# lfe: clustered by firm
est_lfe = felm(inv ~ capital  firm + year  0  firm, Grunfeld)
se_lfe_firm = se(est_lfe)
# The two are different, and it cannot be directly replicated by feols
rbind(se_lfe_firm, se_feols_firm)
#> capital
#> se_lfe_firm 0.06016851
#> se_feols_firm 0.06328129
# You have to provide a custom VCOV to replicate lfe's VCOV
my_vcov = vcov(est_feols, ssc = ssc(adj = FALSE))
se(est_feols, vcov = my_vcov * 199/198) # Note that there are 200 observations
#> capital
#> 0.06016851
# Differently from feols, the SEs in lfe are different if year is not a FE:
# => now SEs are identical.
rbind(se(felm(inv ~ capital + factor(year)  firm  0  firm, Grunfeld))["capital"],
se(feols(inv ~ capital + factor(year)  firm, Grunfeld))["capital"])
#> capital
#> [1,] 0.06328129
#> [2,] 0.06328129
# Now with twoway clustered standarderrors
est_lfe_2way = felm(inv ~ capital  firm + year  0  firm + year, Grunfeld)
se_lfe_2way = se(est_lfe_2way)
se_feols_2way = se(est_feols, vcov = "twoway")
rbind(se_lfe_2way, se_feols_2way)
#> capital
#> se_lfe_2way 0.06213837
#> se_feols_2way 0.06041290
# To obtain the same SEs, use cluster.df = "conventional"
sum_feols_2way_conv = summary(est_feols, vcov = twoway ~ ssc(cluster.df = "conv"))
rbind(se_lfe_2way, se(sum_feols_2way_conv))
#> capital
#> se_lfe_2way 0.06213837
#> 0.06213837
#> capital
#> [1,] 9.273982e05
#> [2,] 9.273982e05
As we can see, there is only slight differences with lfe
when computing clustered standarderrors. For multiway clustered
standarderrors, it is easy to replicate the way lfe
computes them.
Defining how to compute the standarderrors once and for all
Once you’ve found the preferred way to compute the standarderrors
for your current project, you can set it permanently using the functions
setFixest_ssc()
and setFixest_vcov()
.
For example, if you want to remove the small sample adjustment, just use:
setFixest_ssc(ssc(adj = FALSE))
By default, the standarderrors are clustered in the presence of fixedeffects and in the presence of a panel. You can change this behavior with, e.g.:
setFixest_vcov(no_FE = "iid", one_FE = "iid",
two_FE = "hetero", panel = "driscoll_kraay")
which changes the way the default standarderrors are computed when the estimation contains no fixedeffects, one fixedeffect, two or more fixedeffects, or is a panel.
Changelog

Version 0.10.0 brings about many important changes:
The arguments
se
andcluster
have been replaced by the argumentvcov
. Retro compatibility is ensured.The argument
dof
has been renamed tossc
for clarity (since it was dealing with small sample correction). This is not retro compatible.Three new types of standarderrors are added: NeweyWest and DriscollKraay for panel data; Conley to account for spatial correlation.
The argument
ssc
can now be directly summoned in thevcov
formula.The functions
setFixest_dof
andsetFixest_se
have been renamed intosetFixest_ssc
andsetFixest_vcov
. Retro compatibility is not ensured.The default standarderror name has changed from
"standard"
to"iid"
(thanks to Grant McDermott for the suggestion!).Since
lfe
has returned to CRAN (good news!), the code chunks involving it are now reevaluated.The illustration is now based on the Grunfeld data set from the
plm
package (to avoid problems with RNG).
Version 0.8.0. Evaluation of the chunks related to
lfe
have been removed since its archival on the CRAN. Hard values from the last CRAN version are maintained.
Version 0.7.0 introduces the following important modifications:
To increase clarity,
se = "white"
becomesse = "hetero"
. Retrocompatibility is ensured.The default values for computing clustered standarderrors become similar to
reghdfe
to avoid crosssoftware confusion. That is, now by defaultcluster.df = "min"
andt.df = "min"
(whereas in the previous version it wascluster.df = "conventional"
andt.df = "conventional"
).
References & acknowledgments
I wish to thank Karl Dunkle Werner, Grant McDermott and Ivo Welch for raising the issue and for helpful discussions. Any error is of course my own.
Cameron AC, Gelbach JB, Miller DL (2011). “Robust Inference with Multiway Clustering”, Journal of Business & Ecomomic Statistics, 29(2), 238–249.
Kauermann G, Carroll RJ (2001). “A Note on the Efficiency of Sandwich Covariance Matrix Estimation”, Journal of the American Statistical Association, 96(456), 1387–1396.
MacKinnon JG, White H (1985). “Some heteroskedasticityconsistent covariance matrix estimators with improved finite sample properties” Journal of Econometrics, 29(3), 305–325.
Millo G (2017). “Robust Standard Error Estimators for Panel Models: A Unifying Approach” Journal of Statistical Software, 82(3).
Zeileis A, Koll S, Graham N (2020). “Various Versatile Variances: An ObjectOriented Implementation of Clustered Covariances in R” Journal of Statistical Software, 95(1), 1–36.