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st: Hansen's overidentification test interpretation in xtivreg2

From   Ari Dothan <>
To   statalist <>
Subject   st: Hansen's overidentification test interpretation in xtivreg2
Date   Wed, 23 Feb 2011 09:52:13 +0200

Hi all, Professor Baum,

I am trying to understand whether the J-stat should be large or small.
There is some information which appears to be contradictory:

1. From the help screen: " 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". Therefore, a SMALL  J-stat will indicate that
instruments are valid.

However, in the 2007 guidebook by Baum, Scahffer & Stillman, a Hansen
statistic of 0.3119 is presented on page 11. The explanatory text is:
"the statistic is now far from the rejection of its null, giving us
the confidence that our instrument set is appropriate"

I would much appreciate an explanation of why are the instruments
"appropriate" when they are not valid.

Thanking you

Ari Dothan
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