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st: ivreg2/xtivreg2, clustering, and the covariance matrix of moment conditions


From   Augusto Cadenas <aug.cadenas@googlemail.com>
To   statalist@hsphsun2.harvard.edu
Subject   st: ivreg2/xtivreg2, clustering, and the covariance matrix of moment conditions
Date   Wed, 18 Feb 2009 16:05:11 -0500

Dear all,

when working with one of my panel datasets with -xtivreg2-, I get the
well-known error message:

***
Warning: estimated covariance matrix of moment conditions not of full rank.
         standard errors and model tests should be interpreted with caution.
Possible causes:
         number of clusters insufficient to calculate robust covariance matrix
         singleton dummy variable (dummy with one 1 and N-1 0s or vice versa)
partial option may address problem.
***

I saw this error message being discussed often here, but I was
wondering if there is a simple rule that explains when this problem
occurs. Can we relate it simply to the number of observations,
clusters, regressors of the model?

For example, I have N=8, T=12, a balanced panel (N*T=96), and want to
have one cluster for each state (N), so M=8. The model I estimate has
time and state fixed effects and only one regressor beyond that, so
1+7+11 coefficients to estimate. Is that because 19>8?

The other thing I'm wondering about is: why can Stata still compute
standard errors in this case (even though they "should be interpreted
with caution"), but can't compute the overid test in the case in which
I have more than one instrument? (I tried both the perfectly
identified and the overid case).

Thanks for your suggestions.

AC
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