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Re: st: hausman's test with xtivreg2


From   "Erasmo Giambona" <e.giambona@gmail.com>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: hausman's test with xtivreg2
Date   Fri, 20 Apr 2007 13:02:52 -0400

Kit,

in a previous email you mentioned the possibility that the endogeneity
test can be done within the FE context or the IV framework:
Kit said:
"I think what is being confused here is that one could do two Hausman
tests in a FE context: one for FE vs RE (which does question the
correlation between regressor and fixed effect) and another, in the
pure FE context, for endogeneity of regressors. That is, the test of
OLS vs IV for the LSDV model. The former Hausman test would look at
the correlation between regressor (mangerial ownership) and the firm-
specific effect, but if done purely in a OLS/LSDV framework, could be
weakened if OLS is inappropriate in the first place. But I don't see
how that critique would apply if the test was done in a IV framework,
allowing for endogeneity of regressors."

I obtained the conditional moment test within the FE suggested in the
paper and found strong rejection for exogeneity (unlike what I find
with the endog option in xtivreg2).

If you have any thoughts on this, it would be truly appreciated.

Erasmo





On 4/20/07, Erasmo Giambona <e.giambona@gmail.com> wrote:
Thanks Mark and Kit. This was really helpful. I had thought that paper
could explain why I get FE-IV estimates for the "endogenous" variables
that are quite different from FE-OLS, but the endog option shows no
signs of endogeneity.
Best regards,
Erasmo

On 4/20/07, Kit Baum <baum@bc.edu> wrote:
> Mark said
>
>  >
>  > "One can formalize this evidence against the exogeneity of
>  > managerial ownership by testing for a correlation between the
>  > fixed effect and managerial
>  > ownership. We could use a Hausman (1978) test, but this test
>  > would tend to
>  > over-reject the null hypothesis of zero correlation because
>  > it would tend to reject
>  > if any of the explanatory variables were correlated with the
>  > fixed effect.
>  > To reduce this Type I error, we construct a more precise
>  > &conditional moment'
>  > test, which is in the spirit of a Hausman test, but tends to
>  > reject only if
>  > managerial ownership is the source of the specification error
>  > (Greene, 1997, p. 534; Newey, 1985)."
>
> This is very curious.  Do we have the context right?
>
> If I'm not mistaken, the above makes sense if the authors are talking
> about the application of a Hausman test to an equation without fixed
> effects.  In that case, omission of the fixed effects would generate
> omitted variable bias if the explanatory variables are correlated with
> the omitted "fixed effects" since they are now in the error term.
>
> But say we apply the Hausman test to a fixed effects estimation done as
> a LSDV (least squares dummy variable) estimation.  Then I can't see what
> the problem would be.  There's nothing wrong with explanatory variables
> being correlated with each other, and the LSDVs that are included as
> regressors are just that.
>
>
> I think what is being confused here is that one could do two Hausman
> tests in a FE context: one for FE vs RE (which does question the
> correlation between regressor and fixed effect) and another, in the
> pure FE context, for endogeneity of regressors. That is, the test of
> OLS vs IV for the LSDV model. The former Hausman test would look at
> the correlation between regressor (mangerial ownership) and the firm-
> specific effect, but if done purely in a OLS/LSDV framework, could be
> weakened if OLS is inappropriate in the first place. But I don't see
> how that critique would apply if the test was done in a IV framework,
> allowing for endogeneity of regressors.
>
>
>
> Kit Baum, Boston College Economics
> http://ideas.repec.org/e/pba1.html
> An Introduction to Modern Econometrics Using Stata:
> http://www.stata-press.com/books/imeus.html
>
>
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