Hello,
I have a quarterly panel dataset on which I am running
a dynamic fixed effects model using the ivreg,gmm
option (I have also tried using xtivreg2). I am not
sure whether or not some of my regressors are
endogenous and require instrumentalisation. I am
trying to test this using the endog option. My
confusion is that the outcome from the endog test
depends on what instrument one uses for the suspect
variable. With some instruments the suspect variable
appears endogenous, with others not. However, not even
being sure which is an appropriate instument, how do I
establish whether or not the suspect variable is
endogenous in the first place and hence even needing
to be instrumentalised?
(I have already read the help files as well as the
Baum-Schaffer-Stillman paper and tried searching on
the list archives).
I have pasted below my specification and the relevant
portion of the output for 3 regressions, the only
difference being the instrument used to instrument the
suspect variable (d) which I am testing whether or not
it is endogenous. If I read the output correctly, in
regression 1 (in which the instrument is the same
variable lagged 4 periods back) it seems that we
reject Ho that the suspect variable (d) is exogenous,
ie it does need to be instrumentalised. Regression 2
(in which the instrument is the one-lagged variable)
doesnt even give an output on endog. According to
regression 3 (in which the instrument is another
variable, e) it seems we fail to reject Ho so the
suspect variable (d) is exogenous. How do I know
whether or not it actually is endogenous without
knowing which is the "right" intrument?
A follow-up question would then be, if the suspect
variable is indeed endogenous and needs to be
instrumented, how I decide which instrument is best?
Regression 1:
ivreg2 ROA l.ROA a b c (d=l4.d), gmm endog(d) robust
cl(key)
Hansen J statistic (overidentification test of all
instruments): 0.000
(equation exactly identified)
-endog- option:
Endogeneity test of endogenous regressors:
9.550
Chi-sq(1) P-val = 0.0020
Regressors tested: d
------------------------------------------------------------------------------
Instrumented: d
Included instruments: L.ROA a b c
Excluded instruments: l4.d
---------------------------------
===============
Regression 2:
ivreg2 ROA l.ROA a b c (d=l.d), gmm endog(d) robust
cl(key)
Hansen J statistic (overidentification test of all
instruments): 0.000
(equation exactly identified)
Collinearity/identification problems in eqn. excl.
suspect orthog. conditions:
C statistic not calculated for -orthog- option
------------------------------------------------------------------------------
Instrumented: d
Included instruments: L.ROA a b c
Excluded instruments: l.d
==========================================
Regression 3:
ivreg2 ROA l.ROA a b c (d=e), gmm endog(d) robust
cl(key)
Hansen J statistic (overidentification test of all
instruments): 0.000
(equation exactly identified)
-endog- option:
Endogeneity test of endogenous regressors:
0.925
Chi-sq(1) P-val = 0.3362
Regressors tested: d
------------------------------------------------------------------------------
Instrumented: d
Included instruments: L.ROA a b c
Excluded instruments: e
---------------------------------
Thanks so much for any help with this I am so
frustrated!
Debbie
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