Finance - Comparisons of methods of causal inference

4 important questions on Finance - Comparisons of methods of causal inference

What are the five methods of causal inference?

1. Randomization
2. Instrumental variable
3. Difference-in-Difference
4. Propensity score matching
5. Discontinuity regression

What is propensity score matching?

For each of the observations in the treatment sample, we find observations that are similar in several characteristics and assign them to the control group (find a company that has tax advantages and compare to a very similar company that didn't)

We have to account for these characteristics because otherwise these characteristics might influence Y

When do we use regression discontinuity?

If an intervention has a clear, sharp assignment rule
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What is regression discontinuity?

Regulations push the independent variable to a different level, depending on the level of a second forcing variable around a threshold

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