Hi,
I have been running the examples provided at the end of the documentation
for ivreg2 using the Griliches data (Wages of very young men, JPE '76), and
I have trouble interpreting the results of the tests for instrument
validity. The model is
ivreg2 lw s expr tenure rns smsa _I* (iq=med kww age mrt)
The tests for joint validity of the list of instruments (Sargan, Basman,
pseudo-S, pseudo-B, Hansen J in the case of GMM) all reject the null, ie
the excluded instruments are NOT jointly valid. Is this interpretation
correct ?
The orthog(age mrt) option further tests whether the subset (age mrt) of
instruments is valid
ivreg2 lw s expr tenure rns smsa _I* (iq=med kww age mrt), gmm orthog(age
mrt)
The C statistic rejects the null, implying that (age mrt) are NOT valid.
Correct ?
At the same time the Hansen J for the UNrestricted equation now fails to
reject its null, implying that the complementary subset of instruments (kww
med) ARE valid. Is this interpretation correct ?
Now I ran the same regression with the orthog option on the complementary
subset (kww med), ie
ivreg2 lw s expr tenure rns smsa _I* (iq=med kww age mrt), gmm orthog(kww
med)
In view of the above, I expected the Hansen J on the unrestricted model to
reject its null, and the C statistic not to reject its null. The former
expectation is confirmed, but the C statistic does reject, implying that
(kww med) are NOT valid. Is this not a contradiction to the Hansen J test
result above, which seemed to suggest that (kww med) are valid ?
Leaving aside the Hansen J results, the C results would suggest that none
of the (two pairs of) instruments are valid. But when I ran the regressions
with only (age mrt) and only (kww med) used as excluded instruments, ie
ivreg2 lw s expr tenure rns smsa _I* (iq=age mrt), gmm
ivreg2 lw s expr tenure rns smsa _I* (iq=kww med), gmm
the Hansen J failed to reject the null in both cases , suggesting that both
subsets ARE valid instruments ?!
So what am I missing here ?
Thanks
Ralph
Ralph Heinrich
Economic Affairs Officer
Economic Analysis Division
UN Economic Commission for Europe
room 441
Palais des Nations
1211 Geneva 10
phone: 0041 22 917 1269
http://www.unece.org/ead/ead_h.htm
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