Lags, Leave-Outs and Fixed Effects

Alexander Chudik; Cameron M. Ellis; Johannes G. Jaspersen

doi:10.24149/wp2536

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Lags, Leave-Outs and Fixed Effects

Alexander Chudik, Cameron M. Ellis and Johannes G. Jaspersen

Working paper, Vol.2536

Federal Reserve Bank of Dallas

09/2025

DOI: 10.24149/wp2536

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Abstract

To avoid endogeneity, financial economists often construct regressors and/or instruments using values from other observations, with lagged and leave-out variables being common examples. We examine the use of such variables in common settings with fixed effects and show that it can induce bias and distort inference. We illustrate the severity of this problem via simulations and with patent examiner data. Even when scrambling the patent examiners, thus removing any instrument validity, the bias leads to a first-stage F-statistic over 1,000. General and case-specific solutions are provided.

Details

Title: Subtitle: Lags, Leave-Outs and Fixed Effects
Creators: Alexander Chudik
Cameron M. Ellis
Johannes G. Jaspersen
Resource Type: Working paper
Publication Details: Working paper, Vol.2536
DOI: 10.24149/wp2536
ISSN: 1932-4340
eISSN: 1931-2989
Publisher: Federal Reserve Bank of Dallas; Dallas, Texas
Number of pages: 58 pages
Language: English
Date posted: 09/2025
Academic Unit: Finance
Record Identifier: 9984966337102771

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