N°24-03: Robust difference-in-differences analysis when there is a term structure

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.