Essays in causal inference methods designed for financial economics

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Authors: WANG, CONG
Cited by: 0

Abstract

In this paper, we propose a novel method for causal inference within the counterfactual and synthetic control framework, called the Covariate-projected Principal Component Analysis (CSC-CPCA) method. Our approach accommodates the Generalized Synthetic Control (GSC) method as a special case, thereby inheriting its key advantage of relaxing critical assumptions such as the parallel trends requirement in difference-in-differences designs. Beyond this, CSC-CPCA offers several improvements over GSC. By projecting covariates onto factor loadings through a projection matrix $\Gamma$, the method performs natural dimension reduction, enabling effective handling of high-dimensional datasets while keeping the model parsimonious. This covariate-projection also reduces exposure to model misspecification and improves predictive accuracy. In simulation studies, CSC-CPCA method demonstrates lower bias in the presence of unobserved covariates compared to mainstream alternatives. In an empirical application, we employ CSC-CPCA to evaluate the effect of Brexit on foreign direct investment in the United Kingdom, where the results highlight both the robustness and practical value of the method.

Fields of Study & Subjects

Advanced Causal Inference Techniques Spatial and Panel Data Analysis Monetary Policy and Economic Impact

Publication details

Journal / source
IRIS Research product catalog (Sapienza University of Rome)
Publication date
26 January 2026
Language
EN
Document type
Thesis