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st: dynamic panel - bootstrapped Sargan and exclusion tests


From   Bernardo Schettini <bernardo.schettini@gmail.com>
To   statalist@hsphsun2.harvard.edu
Subject   st: dynamic panel - bootstrapped Sargan and exclusion tests
Date   Fri, 24 Jun 2011 14:01:25 -0300

Dear Statalisters,

I estimating a dynamic panel model via system GMM and difference GMM.
My panel is balanced with N=4156 municipalities and T=9 years of data,
NT=41560. I need to start with 3 lags of each variable, including the
dependent variable, and then test for lag reduction.

xtabond2 y1 l(1/3).(y1 y2 y3), gmm(l.y1 l.y2 l.y3) twostep robust
xtabond2 y1 l(1/3).(y1 y2 y3), gmm(l.y1 l.y2 l.y3) twostep robust noleveleq

The number of instruments is 99 and 121, respectively. The
autocorrelation pattern is exactly what one expects from a dynamic
panel model (rejects AR(2) but not AR(1) residuals).

It happens the Sargan and Hansen tests always reject the moment
conditions in system GMM and difference GMM. Reducing the number of
instruments won't validate the instruments, and reported p-values are
always 0.00.  After some experimentations, I was led to conclude that
either (i) overidentifying restrictions are really not valid, or (ii)
asymptotic values are leading to overrejection of a correct null.

Under (i), I could always use and exactly identified model and produce
2SLS estimates (using the lagged level as the instrument for the 1st
difference). Ok, but how to test for lag reduction? Using Wald-type
tests? I am not sure if that is correct. With overidentified models,
some papers use difference-in-Sargan tests. The problem is my model is
just identified under this 2SLS estimation procedure.

Under (ii), one alternative is to use bootstrapped critical values. It
happens xtabond2 won't accept "boostrap, reps(#)" (it allows for
jacknife, but it takes forever). I saw an old discussion in this
forum, and some of you had a similar problem. I wonder if anyone can
help me create bootstraped critical values for the Sargan test.

Thank you,
Bernardo Schettini

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