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From |
"Schaffer, Mark E" <M.E.Schaffer@hw.ac.uk> |

To |
<statalist@hsphsun2.harvard.edu> |

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

Date |
Thu, 19 Feb 2009 16:50:48 -0000 |

Augusto, > -----Original Message----- > From: owner-statalist@hsphsun2.harvard.edu > [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of > Augusto Cadenas > Sent: 18 February 2009 21:05 > To: statalist@hsphsun2.harvard.edu > Subject: st: ivreg2/xtivreg2, clustering, and the covariance > matrix of moment conditions > > 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? Sometimes. See Baum-Schaffer-Stillman, Stata Journal 2003 (sorry, on the road, don't have the exact link). > 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? If you are using xtivreg2, then you probably estimating a fixed effects model with 8 fixed effects and 11 time dummies. The fixed effects are NOT explicitly estimated - as usual with the FE model, they are partialled out using the within transformation (demeaning). Thus you are probably obtaining 1+11=12 explicit coefficient estimates. But your conclusion is basically correct. Because 12 (number of coefficients, var-cov matrix of moment conditions is 12x12) > 8 (number of clusters, rank of the var-cov matrix of moment conditions), the var-cov matrix of moment conditions is not of full rank. > 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). Because the overid test requires the var-cov matrix of moment conditions to be of full rank and invertible. You should investigate the -partial- option, as suggested by the error message. If you partial out your time dummies along with the fixed effects, the var-cov matrix of (remaining) moment conditions will be 1x1 and you'll get your overid statistics. HTH. Cheers, Mark Prof. Mark Schaffer Director, CERT Department of Economics School of Management & Languages Heriot-Watt University Edinburgh EH14 4AS tel +44-131-451-3494 / fax +44-131-451-3296 http://ideas.repec.org/e/psc51.html > Thanks for your suggestions. > > AC > * > * For searches and help try: > * http://www.stata.com/help.cgi?search > * http://www.stata.com/support/statalist/faq > * http://www.ats.ucla.edu/stat/stata/ > -- Heriot-Watt University is a Scottish charity registered under charity number SC000278. * * For searches and help try: * http://www.stata.com/help.cgi?search * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/

**Follow-Ups**:**Re: st: RE: ivreg2/xtivreg2, clustering, and the covariance matrix of moment conditions***From:*Augusto Cadenas <aug.cadenas@googlemail.com>

**References**:**st: ivreg2/xtivreg2, clustering, and the covariance matrix of moment conditions***From:*Augusto Cadenas <aug.cadenas@googlemail.com>

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