st: RE: RE: RE: RE: RE: RE: RE: RE: RE: RE: xtivreg2: orthog option

["Schaffer, Mark E" <M.E.Schaffer@hw.ac.uk>]

James,


> -----Original Message-----
> From: owner-statalist@hsphsun2.harvard.edu 
> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of 
> Fitzgerald, James
> Sent: 05 July 2012 11:15
> To: statalist@hsphsun2.harvard.edu
> Subject: st: RE: RE: RE: RE: RE: RE: RE: RE: RE: xtivreg2: 
> orthog option
> 
> Mark,
> 
> I followed your suggestion as far as I understood it. As 
> such, I undertook the following steps:
> 
> 1. I estimated the model with suspect instruments treated as 
> endogenous. As I have no reason to suspect any one regressor 
> is endogenous and others are not, I ran the model with all 
> regressors assumed to be endogenous and used 3 lags as 
> exluded instruments.
> 
> xtivreg2 ltdbv yr* (lnsale tang itang itangdum tax prof mtb 
> capexsa liq ndts=l.lnsale l2.lnsale l3.lnsale l.tang l2.tang 
> l3.tang l.itang l2.itang l3.itang l.itangdum l2.itangdum 
> l3.itangdum l.tax l2.tax l3.tax l.prof l2.prof l3.prof l.mtb 
> l2.mtb l3.mtb l.capexsa l2.capexsa l3.capexsa l.liq l2.liq 
> l3.liq l.ndts l2.ndts l3.ndts), fe cluster(firm) gmm2s
> 
> The p-value on the Hansen J-Stat turned out to be 0.01.
> 
> 2. I then tested the orthogonality of the different lags 
>      orthog(l.lnsale l.tang . . . l.ndts) gave a C stat 
> p-value of 0.5196
>      orthog(l2.lnsale l2.tang . . . l2.ndts) gave a C stat 
> p-value of 0.3318
>      orthog(l3.lnsale l3.tang . . . l3.ndts) gave a C stat 
> p-value of 0.0022
> 
> 3. I dropped the l3 lags and the Hansen J Stat p-value was 0.5588.
>     I then used the endog option on each of the endogenous 
> variables i.e. 
> 
> xtivreg2 ltdbv yr* (lnsale tang itang itangdum tax prof mtb 
> capexsa liq ndts=l.lnsale l2.lnsale l3.lnsale l.tang l2.tang 
> l.itang l2.itang l.itangdum l2.itangdum l.tax l2.tax l.prof 
> l2.prof l.mtb l2.mtb l.capexsa l2.capexsa l.liq l2.liq l.ndts 
> l2.ndts), fe cluster(firm) gmm2s endog(lnsale)
> 
> And replaced lnsale with tang, itang etc. 
> 
> 4. All the endog tests indicated the regressors are not 
> endogenous, so I conclude there is no need to use xtivreg2, 
> fe and instead I can use xtreg, fe
> 
> How does this sound??
> 
> James
> ________________________________________

<snip>

This looks reasonable.  Just a few thoughts:

In steps 1-2, it looks like you are getting a large C stat for L3
because L1 and L2 are identifying one beta_hat, and L3 is identifying a
different beta_hat.  At least one of these two beta_hats must be
inconsistent.  You're concluding that the 2nd one is inconsistent, and
so you're dropping the L3s as IVs.

This could be defensible, but it looks a bit odd.  The more usual case
is that older lags are more likely to be valid IVs than recent lags.

An alternative interpretation of your results is that the 1st beta_hat
is inconsistent, and so you should drop the L1s and L2s and use just the
L3s as IVs.  You might want to try that and see what happens.  (There's
no point doing a C test for the L1s and L2s, by the way, because using
just the L3s gives you an exactly identified equation, and the C stat
will the same large J stat you got when you used all the IVs.)

Also, in step 3, you can test for the endogeneity of all your regressors
lnsale-ndts all at once - the endog option takes varlists.

Cheers,
Mark


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