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re: st: One question about XTOVERID

From   Christopher Baum <>
To   "" <>
Subject   re: st: One question about XTOVERID
Date   Wed, 28 Dec 2011 12:01:09 -0500


I saw a lot of introduction about XTOVERID on internet. But i still
have one simple question.

When using XTOVERID determine FE and RE, can anybody tell me what is
the null hypothesis?

For instance, in my case, when running XTOVERID, my p-value is bigger than 0.1.

Does it mean FE model is better?

As the help file for Schaffer & Stillman's -xtoverid- (from SSC) explains, the "Hausman test" for FE vs RE can
also be cast as a test of the additional overidentifying restrictions that RE imposes. FE (xtreg, fe) is consistent
iff X \perp \epsilon, where X contains regressors and \epsilon is the idiosyncratic error. FE does not require
that X \perp u, where u is the fixed effect. RE does require that X \perp u, so there are additional overidentifying
restrictions associated with RE. The null of either the Hausman form of the test or of the test performed by
xtoverid is that RE is consistent. A large value of the test statistic (or a small p-value of the statistic) is a rejection
of that null, saying that RE is inconsistent. If you are getting a p-value of 0.15 or 0.20, then the evidence 
against RE is not that strong, and you can get away with the RE assumptions on the error process.


Kit Baum   |   Boston College Economics & DIW Berlin   |
                             An Introduction to Stata Programming  |
  An Introduction to Modern Econometrics Using Stata  |

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