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A Consistent Nonparametric Bootstrap Test of Exogeneity

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  • Lee, Jinhyun
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    Abstract

    This paper proposes a novel way of testing exogeneity of an explanatory variable without any parametric assumptions in the presence of a "conditional" instrumental variable. A testable implication is derived that if an explanatory variable is endogenous, the conditional distribution of the outcome given the endogenous variable is not independent of its instrumental variable(s). The test rejects the null hypothesis with probability one if the explanatory variable is endogenous and it detects alternatives converging to the null at a rate n..1=2:We propose a consistent nonparametric bootstrap test to implement this testable implication. We show that the proposed bootstrap test can be asymptotically justi.ed in the sense that it produces asymptotically correct size under the null of exogeneity, and it has unit power asymptotically. Our nonparametric test can be applied to the cases in which the outcome is generated by an additively non-separable structural relation or in which the outcome is discrete, which has not been studied in the literature.

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    File URL: http://repo.sire.ac.uk/handle/10943/512
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    Bibliographic Info

    Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2013-95.

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    Date of creation: 2013
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    Handle: RePEc:edn:sirdps:512

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