<p>I am looking to research the impact of Brexit on the FTSE100 index.</p>
<p>FTSE100 is an stock index of the 100 largest UK companies. The UK also has FTSE250 which is an index of 250 mid-cap companies (not included in FTSE100 - i.e. the two indices are disjoint).</p>
<p>Brexit was a referendum the result of which was revealed on 24-Jun-2016. The vote was on &quot;Remain vs Leave the EU&quot;. The result was expected to be close but it was expected that Remain would win. It did not. Following 4 years of negotiations the UK left the EU on 31-Jan-2020.</p>
<p>I can fetch daily index data from yahoo finance.</p>
<p>The most basic questions for the suitability of difference-in-difference methods are the following:</p>
<ol>
<li>Should I use prices or returns? Prices are of course non-stationary as they include a trend. Returns are also non-stationary but at least they don't have a trend. In time-series models I've always used returns for any further research.</li>
<li>Difference-in-difference uses linear regression but returns are heteroscedastic time-series and so linear regression assumptions are not met (although daily-returns are more normal)</li>
<li>Can a EU stock market be taken as the untreated group? The argument being that while the EU was also impacted it was much less so. I am reluctant to use the S&amp;P500 in the US because (a) it is much different (more high-tech companies) and (b) in 2016 we have another treatment in the US - Trump got elected.</li>
</ol>

CC BY-SA 4.0
2024-04-18T20:56:33.920Z
Linear regression does not assume homoscedasticity for consistency of estimates. However, standard errors should be calculated using heteroscedasticity robust std. errors.
Jesper Hybel
CC BY-SA 4.0
2024-04-18T21:16:35.343Z
@JesperHybel Googling for "Assumptions of linear regression" points to a few sources which all state that homoscedasticity is assumed: https://www.ncl.ac.uk/webtemplate/ask-assets/external/maths-resources/statistics/regression-and-correlation/assumptions-of-regression-analysis.html
s5s
CC BY-SA 4.0
2024-04-18T21:27:56.997Z
@s5s yes homoscedasticity is assumed for OLS to be BLUE - best linear unbiased estimator. If heteroskedasticity is present, OLS is still LUE - linear **unbiased** (i.e. consistent) estimator. Heteroskedasticity causes loss of efficiency, but estimates are still good. As Jasper pointed the loss of efficiency can be fixed with consistent standard errors
1muflon1
CC BY-SA 4.0
2024-04-18T21:28:06.023Z
Yes, and everything on the internet is true ... Homoscedasticity is part of a set of assumptions under which OLS is BLUE: https://en.wikipedia.org/wiki/Gauss%E2%80%93Markov_theorem. These assumptions are very popular so you often find imprecise statements referring to the assumptions of linear regression that includes the assumption of homoscedasticity. However, as I said homoscedasticity is not necessary for OLS to be consistent. Which is really what you want (efficiency is second order).
Jesper Hybel
CC BY-SA 4.0
2024-04-19T18:23:17.133Z
As an aside. The above comments are correct to point out that heteroskedasticity is not a big deal. What is more of an issue is finding a suitable control group. The EU stock market is directly affected by Brexit too as you point out hence it is also treated. Another concern is parallel trends. Do they hold in the pre-period? Given the differences in policy and institutional environment, I am not convinced they would.
Econometric Novice
<macroeconomics><econometrics><stock-market><asset-pricing><difference-in-difference>
Difference in difference on election impact on asset prices?
s5s
# Difference in difference on election impact on asset prices?

(Asked by: username_0 on 2024-04-18)

I am looking to research the impact of Brexit on the FTSE100 index.

FTSE100 is an stock index of the 100 largest UK companies. The UK also has FTSE250 which is an index of 250 mid-cap companies (not included in FTSE100 - i.e. the two indices are disjoint).

Brexit was a referendum the result of which was revealed on 24-Jun-2016. The vote was on "Remain vs Leave the EU". The result was expected to be close but it was expected that Remain would win. It did not. Following 4 years of negotiations the UK left the EU on 31-Jan-2020.

I can fetch daily index data from yahoo finance.

The most basic questions for the suitability of difference-in-difference methods are the following:

1. Should I use prices or returns? Prices are of course non-stationary as they include a trend. Returns are also non-stationary but at least they don't have a trend. In time-series models I've always used returns for any further research.
2. Difference-in-difference uses linear regression but returns are heteroscedastic time-series and so linear regression assumptions are not met (although daily-returns are more normal)
3. Can a EU stock market be taken as the untreated group? The argument being that while the EU was also impacted it was much less so. I am reluctant to use the S&P500 in the US because (a) it is much different (more high-tech companies) and (b) in 2016 we have another treatment in the US - Trump got elected.

**Tags:** macroeconomics, econometrics, stock-market, asset-pricing, difference-in-difference
> **Comments:**
> **username_1**: Linear regression does not assume homoscedasticity for consistency of estimates. However, standard errors should be calculated using heteroscedasticity robust std. errors.  
> **username_0**: @JesperHybel Googling for "Assumptions of linear regression" points to a few sources which all state that homoscedasticity is assumed: https://www.ncl.ac.uk/webtemplate/ask-assets/external/maths-resources/statistics/regression-and-correlation/assumptions-of-regression-analysis.html  
> **username_2**: @s5s yes homoscedasticity is assumed for OLS to be BLUE - best linear unbiased estimator. If heteroskedasticity is present, OLS is still LUE - linear **unbiased** (i.e. consistent) estimator. Heteroskedasticity causes loss of efficiency, but estimates are still good. As Jasper pointed the loss of efficiency can be fixed with consistent standard errors  
> **username_1**: Yes, and everything on the internet is true ... Homoscedasticity is part of a set of assumptions under which OLS is BLUE: https://en.wikipedia.org/wiki/Gauss%E2%80%93Markov_theorem. These assumptions are very popular so you often find imprecise statements referring to the assumptions of linear regression that includes the assumption of homoscedasticity. However, as I said homoscedasticity is not necessary for OLS to be consistent. Which is really what you want (efficiency is second order).  
> **username_3**: As an aside. The above comments are correct to point out that heteroskedasticity is not a big deal. What is more of an issue is finding a suitable control group. The EU stock market is directly affected by Brexit too as you point out hence it is also treated. Another concern is parallel trends. Do they hold in the pre-period? Given the differences in policy and institutional environment, I am not convinced they would.  

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## 0 answers

