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st: re: ivreg2: No validity tests if just-identified?


From   Kit Baum <baum@bc.edu>
To   statalist@hsphsun2.harvard.edu
Subject   st: re: ivreg2: No validity tests if just-identified?
Date   Wed, 15 Apr 2009 21:38:28 -0400

<>
Jennifer said

I worked quite carefully through the various options in ivreg2 and ivregress for testing (a) instrument validity (orthogonality etc) and (b) instrument strength (correlatedness with endogenous regressors). After doing so, I seem to be arriving at the conclusion that there is no way to test (a) if the model is just-identified, i.e. if I have the same number of excluded instruments as I have endogenous regressors). For example, the Sargan overid statistic, the C-statistic, the LR IV redundancy test statistic, etc. all don't get produced unless the model is overidentified. Is that true?! If yes, I would need to rely on persuasion using economic intuition to make my case that the instruments are valid, and there are no statistical tools to use?


Quite so. If you have only just enough instruments to identify the model, there are none available to test overidentifying restrictions, as there is no overid. The J statistic is by definition zero for all exactly identified models. On the other hand, if you have found some variables which you believe are appropriate instruments, transformations of them (powers, lags, interactions) should also be valid instruments, so it is not clear why you are stuck with exact ID.

Kit

Kit Baum   |   Boston College Economics & DIW Berlin   |   http://ideas.repec.org/e/pba1.html
An Introduction to Stata Programming | http://www.stata-press.com/books/isp.html
   An Introduction to Modern Econometrics Using Stata  |   http://www.stata-press.com/books/imeus.html



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