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Re: st: endogeneity and IV


From   Mark Schaffer <M.E.Schaffer@hw.ac.uk>
To   statalist@hsphsun2.harvard.edu, Katarina Lynch <ferkel999@hotmail.com>
Subject   Re: st: endogeneity and IV
Date   Fri, 29 Oct 2004 13:42:30 +0100 (BST)

Katarina,

Quoting Katarina Lynch <ferkel999@hotmail.com>:

> Dear Statalist,
> 
> I am trying to inroduce instrumental variables to fix the
> endogeneity
> problem caused by fixed and random effects regressions. How can I
> determine
> which independent variables are endogenous, i.e. correlated with the
> error
> term? I simply gave the command "pw resid var1 var2 var3 var4" and
> it gave a
> matrix where one of the variables showed a correlation with resid.

That's not how you test for endogeneity.  You want use either a Sargan-
Hansen statistic or the Hausman approach (these are sometimes equivalent, 
depending on the application).

> Does it
> mean that this variable is endogenous or is there any other way? The
> reason
> I am asking this, perhaps, strange question is, in STATA7, the
> xtabond
> command requires predetermined variables in the sense that E(x,
> error) is
> nonzero.

The Sargan(-Hansen) stat at the bottom of the xtabond output is a test of 
your orthogonality conditions, i.e., that your exogenous independent 
variables and instruments are indeed exogenous.

Hope this helps.

--Mark

> 
> Thank you,
> 
> Katarina
> 
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Prof. Mark Schaffer
Director, CERT
Department of Economics
School of Management & Languages
Heriot-Watt University, Edinburgh EH14 4AS
tel +44-131-451-3494 / fax +44-131-451-3008
email: m.e.schaffer@hw.ac.uk
web: http://www.sml.hw.ac.uk/ecomes
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