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Re: st: Collinearity in 2SLS
I think you understood my problem right and I am going to try your
suggestions. It is very good to know what this problem is called.
On 9/15/05, Mark Schaffer <M.E.Schaffer@hw.ac.uk> wrote:
> I don't think you have a collinearity problem, strictly speaking. Rather,
> it sounds like you have a scaling problem that could be causing you
> numerical problems with your estimator.
> When you say the instrumented coefficient in the second stage is "blowing
> up", do you mean that the estimated size of the coefficient is very large
> (several+ orders of magnitude) compared to the other coefficients? Then
> you could indeed have a scaling problem.
> The way to find out (and to deal with the problem, if it exists) is to
> rescale your endogenous variable. Just create a new variable that is 1000
> or whatever times your original variable, and use it in the regression
> instead. Your excluded instruments and other variables might need
> rescaling too. It's easy enough to work out what to do once you see what
> is going on.
> Hope this helps.
> > Dear Statalisters,
> > I am running 2SLS estimations. The instrument used in the first stage
> > is quite good according to traditional standards and tests and its
> > coefficient in the first stage regression is highly significant.
> > HOWEVER, the coefficient although significant is very small. I think
> > this is causing collinearity (if it can be called that in this context
> > - makes sense to me). The instrumented coefficient in the second stage
> > is blowing up big time. However, it is significant and my
> > Durbin-Wu-Hausman test is indicating endogeneity, so that the 2SLS
> > would really be what is called for.
> > 1. Someone told me that I could still trust the sign on the
> > instrumented coefficient, although it is blown up. This "someone"
> > says they read it "somewhere" but are not sure where. I have reached
> > the end of the Internet without finding much. Can I trust the sign of
> > the instrumented coefficient?
> > 2. Can I trust my Durbin-Wu-Hausman test?
> > 3. Any suggestion for what I should do?
> > Tinna
> > *
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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 +44-131-451-3294
> email: email@example.com
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