# Re: st: Collinearity in 2SLS

 From Tinna <[email protected]> To [email protected] Subject Re: st: Collinearity in 2SLS Date Thu, 15 Sep 2005 18:29:35 -0400

```Thanks Mark,
I think you understood my problem right and I am going to try your
suggestions.  It is very good to know what this problem is called.

Tinna

On 9/15/05, Mark Schaffer <[email protected]> wrote:
> Tinna,
>
> I don't think you have a collinearity problem, strictly speaking.  Rather,
> it sounds like you have a scaling problem that could be causing you
> numerical problems with your estimator.
>
> When you say the instrumented coefficient in the second stage is "blowing
> up", do you mean that the estimated size of the coefficient is very large
> (several+ orders of magnitude) compared to the other coefficients?  Then
> you could indeed have a scaling problem.
>
> The way to find out (and to deal with the problem, if it exists) is to
> rescale your endogenous variable.  Just create a new variable that is 1000
> or whatever times your original variable, and use it in the regression
> rescaling too.  It's easy enough to work out what to do once you see what
> is going on.
>
> Hope this helps.
>
> Cheers,
> Mark
>
>
> > Dear Statalisters,
> >
> > I am running 2SLS estimations. The instrument used in the first stage
> > is quite good according to traditional standards and tests and its
> > coefficient in the first stage regression is highly significant.
> > HOWEVER, the coefficient although significant is very small. I think
> > this is causing collinearity (if it can be called that in this context
> > - makes sense to me). The instrumented coefficient in the second stage
> > is blowing up big time. However, it is significant and my
> > Durbin-Wu-Hausman test is indicating endogeneity, so that the 2SLS
> > would really be what is called for.
> >
> > 1. Someone told me that I could still trust the sign on the
> > instrumented coefficient, although it is blown up.  This "someone"
> > says they read it "somewhere" but are not sure where.  I have reached
> > the end of the Internet without finding much. Can I trust the sign of
> > the instrumented coefficient?
> >
> > 2. Can I trust my Durbin-Wu-Hausman test?
> >
> > 3. Any suggestion for what I should do?
> >
> > Tinna
> >
> > *
> > *   For searches and help try:
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> > *   http://www.stata.com/support/statalist/faq
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> >
>
>
> Prof. Mark Schaffer
> Director, CERT
> Department of Economics
> School of Management & Languages
> Heriot-Watt University, Edinburgh EH14 4AS
> tel +44-131-451-3494 / fax +44-131-451-3294
> email: [email protected]
> web: http://www.sml.hw.ac.uk/ecomes
>
>
>
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*
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```