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Robust difference-in-differences analysis when there is a term structure

Author

Listed:
  • Kjell G. Nyborg

    (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

  • Jiri Woschitz

    (BI Norwegian Business School)

Abstract

Difference-in-differences (DiD) analysis is commonly used to study fixed-income pricing. Using simulations, we show that the standard DiD approach applied to variables with a term structure systematically produces false and mismeasured treatment effects, even under random treatment assignment. Standard DiD is misspecified because of endemic heterogeneity over the maturity spectrum and non-matched treated and control-bond samples. Neither bond fixed effects nor standard term-structure controls resolve the problem. We provide solutions using term-structure modeling that allow for heterogeneous effects over the maturity spectrum. These issues are not unique to DiD analysis, but are generic to group-assignment settings.

Suggested Citation

  • Kjell G. Nyborg & Jiri Woschitz, 2024. "Robust difference-in-differences analysis when there is a term structure," Swiss Finance Institute Research Paper Series 24-03, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2403
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    More about this item

    Keywords

    Fixed-income pricing; yield curve; term structure; difference-in-differences analysis; false and mismeasured treatment effects;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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