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

From   John Antonakis <>
Subject   Re: st: re: ivreg2: No validity tests if just-identified?
Date   Thu, 16 Apr 2009 09:10:16 +0200

Hi Kit:

Out of interest, if one could specify how the error terms are handled, then it is possible to test for over-identifying restrictions, correct?

That is:

y = b0 + b1x_hat + e1

x = b11 + b12z + e12

The covariance between e1 and e12 is estimated in ivreg, right? Hence the model is just-identified. Constraining the covariance to be orthogonal would provide for an overidentifying test. However, theoretically, estimating this covariance is necessary to account for the common cause of x and y not included in the model (so it would be an unreasonable restriction to make, unless the model is perfect). Right?



Prof. John Antonakis
Associate Dean Faculty of Business and Economics
University of Lausanne
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CH-1015 Lausanne-Dorigny

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On 16.04.2009 03:38, Kit Baum wrote:
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 Baum | Boston College Economics & DIW Berlin | An Introduction to Stata Programming | An Introduction to Modern Econometrics Using Stata |

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