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st: xtabond2 GMM - valid instrument if AR(2) is a problem
using a simple dynamic model (DPD) I currently face following problem:
Model: y=a1+a2*y(t-1)+ ...
xi: xtabond2 y l.y i.year, gmm(y, lag(3!! 4) equ(both) coll) iv(i.year, equ(both)) small rob twostep arte(3)
I use gmm(y, lag(3 4) and not lag(2 4) because the AB-Test for AR(2) - not shown here - says that there is autocorrlation of second order. Thus I cannot use lag(2) as instrument.
However, my question: Can I use lag(3 4), because the 3rd lag is not correlated with the differenced error term?
Following output of the lag(3 4) estimation says, that the differenced residuals show no AR(3) correlation and the Hansen J is ok:
Hansen test of overid. restr.: chi2(3) = 3,72 Prob > chi2 = 0,432
Arellano-Bond test for AR(1) in first diff: z = -5,76 Pr > z = 0,000
Arellano-Bond test for AR(2) in first diff: z = 2,21 Pr > z = 0,042
Arellano-Bond test for AR(3) in first diff: z = -0,75 Pr > z = 0,433
I am glad for any response I can get on this issue
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