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From |
Erasmo Giambona <e.giambona@gmail.com> |

To |
statalist@hsphsun2.harvard.edu |

Subject |
Re: st: re: overidentifying restrictions |

Date |
Tue, 28 Jul 2009 11:10:03 +0200 |

Thanks Kit. I hope you don't mind if I ask for an additional clarification. I thought that if instruments are orthogonal to epsilon (1), then it must be that they (the instruments) only inderectly influence y (2). That is, it seems to me that (2) is absorbed by (1), but it is very likely that I am missing the point. Erasmo On Mon, Jul 27, 2009 at 9:59 PM, Christopher Baum<baum@bc.edu> wrote: > <> > Erasmo said > > "The Sargan-Hansen test is a test of overidentifying restrictions. The joint > null hypothesis is that the instruments are valid instruments, i.e., > uncorrelated with the error term, and that the excluded instruments are > correctly excluded from the estimated equation. " > My question is about the meaning of the joint null hypothesis. To me is > difficult to envision how the instrument being "uncorrelated with the error > term" is different from the "excluded instruments are correctly excluded > from the estimated equation". > > You could have a model in which both y1 and y2 respond to epsilon, but do > not interact with one another. In that case y2 would not be a valid > instrument for y1 as it would be correlated with epsilon. Nevertheless it > would not enter the y1 equation as significant. The 'correctly excluded from > the estimated equation' clause can be tested with a simple regression: see > whether each of the excluded instruments would have a significant > coefficient if removed from the 'excluded' list and placed in the equation. > But instruments must satisfy three conditions: > 1) orthogonal to epsilon > 2) only indirectly influence y > 3) correlated with that for which they are instruments (that is, they must > not be 'weak') > and the Sargan-Hansen test can consider 1) and 2) together. If the z's are > incorrectly excluded from the y equation, they will be in the error term, > and thus 1) will be violated. > > Kit Baum | Boston College Economics and 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 > > * > * 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/ > * * 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/

**References**:**st: re: overidentifying restrictions***From:*Christopher Baum <baum@bc.edu>

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