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Title: Economic Magnitudes Within Reason

Citation Type: Miscellaneous

Publication Year: 2023

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Abstract: The common method of calculating economic magnitudes is to multiply the regression coefficient of the variable of interest by its sample standard deviation. This method is often problematic in finance settings when researchers use granular fixed effects. For many common finance variables, the sample standard deviation is much larger than the within-group variation that identifies the regression coefficient, and within-group changes of this magnitude are rare. Without additional assumptions, the common approach significantly inflates the economic magnitude of the identified effect and can bias comparisons between different variables of interest. We provide approaches to measure within-group variation for economic magnitude calculations. Abstract The common method of calculating economic magnitudes is to multiply the regression coefficient of the variable of interest by its sample standard deviation. This method is often problematic in finance settings when researchers use granular fixed effects. For many common finance variables, the sample standard deviation is much larger than the within-group variation that identifies the regression coefficient, and within-group changes of this magnitude are rare. Without additional assumptions, the common approach significantly inflates the economic magnitude of the identified effect and can bias comparisons between different variables of interest. We provide approaches to measure within-group variation for economic magnitude calculations.

Url: https://ssrn.com/abstract=4223412

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Authors: Liu, Zack; Winegar, Adam

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Data Collections: IPUMS USA

Topics: Labor Force and Occupational Structure, Methodology and Data Collection

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