st: RE: RE: xtivreg2: orthog option

["Fitzgerald, James" <J.Fitzgerald2@ucc.ie>]

Mark,

Thank you for your reply. I understand what you are saying with regards to the orthogonality of a regressor being dependent on the model specified.

I think maybe my understanding of excluded instruments is incorrect. Do the instruments listed as excluded affect the error term? I was working on the presumption that they did not (and I have no real basis for this presumption except that they are "excluded" from the model specification). 

My reason for implementing xtivreg2 is to investigate whether or not any of my regressors are still endogenous after having controlled for firm specific time invariant effects and firm invariant time specific effects (two way fe model). The only way I know how do to this is to find a set of valid instruments and use the orthog or endog options in xtivreg2. I decided to use lags of my regressors as potential instruments, and found that some are valid and some are not. My problem though is that I am estimating my model on a number of sub-samples from my whole sample. I find that the set of valid instruments changes within each sub-sample, and hence the reason for all the orthogonality tests of both excluded and included instruments within each sub-sample

Is my methodology wrong? Is there any way to test for endogeneity without specifying excluded instruments i.e with either xtreg or xtivreg2?

Would I be better off assuming my regressors are exogenous, as I do not have any strong theoretical justification to believe they are not (and also given that I have controlled for firm and time effects)?

Any advice you could give me is greatly appreciated. I'm a bit lost as to what to do!

Thanks

James
________________________________________
From: owner-statalist@hsphsun2.harvard.edu [owner-statalist@hsphsun2.harvard.edu] on behalf of Schaffer, Mark E [M.E.Schaffer@hw.ac.uk]
Sent: 04 July 2012 18:59
To: statalist@hsphsun2.harvard.edu
Subject: st: RE: xtivreg2: orthog option

James,

> -----Original Message-----
> From: owner-statalist@hsphsun2.harvard.edu
> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of
> Fitzgerald, James
> Sent: 03 July 2012 17:44
> To: statalist@hsphsun2.harvard.edu
> Subject: st: xtivreg2: orthog option
>
> Hi Statalist users,
>
> I am estimating the following model in STATA 11.2:
>
> xtivreg2 ltdbv lnsale tang itang itangdum tax prof mtb
> capexsa liq ndts yr* (=l.lnsale l.tang l.itang l.itangdum
> l.tax l.prof l.mtb l.capexsa l.liq l.ndts) if profsubs>0 &
> capexsasubs>0, fe cluster(firm) gmm2s
>
> In order to ensure my excuded instruments are orthogonal, I
> use the orthog option to test the orthogonality of each
> excluded variable i.e. orthog(l.lnsale) and so on.
>
> Once I have a set of excluded instruments that are orthogonal

I am not sure, but the problem might be here.

You write as if your instruments can have a property called
"orthogonality" in some abstract sense, separate from the model you have
specified.

But that's not how it works.  The orthogonality of Z means E(Zu)=0,
where u is the ("true") disturbance term for a specified model.  If you
change the model, you change the definition of u (u is, in a sense, by
definition everything that is not in the model).  It's quite possible
for E(Zu)=0 for one model but then not be true if you change the model
by adding or dropping regressors.

Apologies if this obvious and not what you meant.  HTH in any case.

Cheers,
Mark

> (say Hansen J Stat p-value >0.5000), I then test the
> orthogonality of each of my included instruments i.e.
> orthog(lnsale) and so on.
>
> However, I am finding that the C-Stat for some of the
> included instruments depends on the set of excluded
> instruments, even though in each case the set of excluded
> instruments appears orthogonal.
>
> For example, when I run the following:
>
> xtivreg2 ltdbv lnsale tang itang itangdum tax prof mtb
> capexsa liq ndts yr* (=l.itang l.prof l.mtb l.capexsa l.liq
> l.ndts) if profsubs>0 & capexsasubs>0, fe cluster(firm) gmm2s
> orthog(tang)
>
> I get the following results in relation to orthogonality tests:
>
> Hansen J statistic (Lagrange multiplier test of excluded
> instruments):   5.104 Chi-sq(6) P-val =    0.5306
> -orthog- option:
> Hansen J statistic (eqn. excluding suspect orthog.
> conditions):          0.853 Chi-sq(5) P-val =    0.9735
> C statistic (exogeneity/orthogonality of suspect
> instruments):           4.250 Chi-sq(1) P-val =    0.0392
> Instruments tested:   tang
> Included instruments: lnsale tang itang itangdum tax prof mtb
> capexsa liq ndts yr90 yr91 yr92 yr93 yr94 yr95 yr96 yr97 yr98
> yr99 yr00
> yr01 yr02 yr03 yr04 yr05 yr06 yr07
> Excluded instruments: L.itang L.prof L.mtb L.capexsa L.liq L.ndts
> Dropped collinear:    yr08
>
> However, when I drop l.capexsa and l.liq from the set of
> excluded instruments I get:
>
>
> Hansen J statistic (Lagrange multiplier test of excluded
> instruments):   0.970 Chi-sq(4) P-val =    0.9143
> -orthog- option:
> Hansen J statistic (eqn. excluding suspect orthog.
> conditions):          0.570 Chi-sq(3) P-val =    0.9033
> C statistic (exogeneity/orthogonality of suspect
> instruments):           0.400 Chi-sq(1) P-val =    0.5271
> Instruments tested:   tang
> Included instruments: lnsale tang itang itangdum tax prof mtb
> capexsa liq ndts yr90 yr91 yr92 yr93 yr94 yr95 yr96 yr97 yr98
> yr99 yr00
> yr01 yr02 yr03 yr04 yr05 yr06 yr07
> Excluded instruments: L.itang L.prof L.mtb L.ndts
> Dropped collinear:    yr08
>
>
> Can anyone tell me why I experience such a large change in
> the C stat for tang?
>
> Best regards
>
> James
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