Re: st: re: ivreg2: No validity tests if just-identified?

[John Antonakis <john.antonakis@unil.ch>]

Hi Kit:

Out of interest, if one could specify how the error terms are handled, 
then it is possible to test for over-identifying restrictions, correct?

That is:

y = b0 + b1x_hat + e1

x = b11 + b12z + e12

The covariance between e1 and e12 is estimated in ivreg, right? Hence 
the model is just-identified. Constraining the covariance to be 
orthogonal would provide for an overidentifying test. However, 
theoretically, estimating this covariance is necessary to account for 
the common cause of x and y not included in the model (so it would be an 
unreasonable restriction to make, unless the model is perfect).  Right?

Best,
John.

____________________________________________________

Prof. John Antonakis
Associate Dean Faculty of Business and Economics
University of Lausanne
Internef #618
CH-1015 Lausanne-Dorigny
Switzerland

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Fax ++41 (0)21 692-3305

____________________________________________________

On 16.04.2009 03:38, Kit Baum wrote:
> <>
> Jennifer said
>
> I worked quite carefully through the various options in ivreg2 and 
> ivregress for testing (a) instrument validity (orthogonality etc) and 
> (b) instrument strength (correlatedness with endogenous regressors). 
> After doing so, I seem to be arriving at the conclusion that there is 
> no way to test (a) if the model is just-identified, i.e. if I have the 
> same number of excluded instruments as I have endogenous regressors). 
> For example, the Sargan overid statistic, the C-statistic, the LR IV 
> redundancy test statistic, etc. all don't get produced unless the 
> model is overidentified. Is that true?! If yes, I would need to rely 
> on persuasion using economic intuition to make my case that the 
> instruments are valid, and there are no statistical tools to use?
>
>
> Quite so. If you have only just enough instruments to identify the 
> model, there are none available to test overidentifying restrictions, 
> as there is no overid. The J statistic is by definition zero for all 
> exactly identified models. On the other hand, if you have found some 
> variables which you believe are appropriate instruments, 
> transformations of them (powers, lags, interactions) should also be 
> valid instruments, so it is not clear why you are stuck with exact ID.
>
> Kit
>
> Kit Baum   |   Boston College Economics & DIW Berlin   |   
> http://ideas.repec.org/e/pba1.html
>                               An Introduction to Stata Programming  
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>    An Introduction to Modern Econometrics Using Stata  |   
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>
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