Finance and Economics Discussion Series (FEDS)
September 2025
Parallel Trends Forest: Data-Driven Control Sample Selection in Difference-in-Differences
Yesol Huh and Matthew Vanderpool Kling
Abstract:
This paper introduces parallel trends forest, a novel approach to constructing optimal control samples when using difference-in-differences (DiD) in a relatively long panel data with little randomization in treatment assignment. Our method uses machine learning techniques to construct an optimal control sample that best meet the parallel trends assumption. We demonstrate that our approach outperforms existing methods, particularly with noisy, granular data. Applying the parallel trends forest to analyze the impact of post-trade transparency in corporate bond markets, we find that it produces more robust estimates compared to traditional two-way fixed effects models. Our results suggest that the effect of transparency on bond turnover is small and not statistically significant when allowing for constrained deviations from parallel trends. This method offers researchers a powerful tool for conducting more reliable DiD analyses in complex, real-world settings.
Keywords: causal inference, difference-in-differences, parallel trends assumption, random forest
DOI: https://doi.org/10.17016/FEDS.2025.091
PDF: Full Paper
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