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The performance of tests on endogeneity of subsets of explanatory variables scanned by simulation

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Author Info

  • Jan F. KIVIET

    (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore)

  • Milan PLEUS

    (Department of Quantitative Economics, Amsterdam School of Economics, University of Amsterdam, Valckenierstraat 65, 1018 XE Amsterdam, The Netherlands)

Abstract

Tests for classification as endogenous or predetermined of arbitrary subsets of regressors are formulated as significance tests in auxiliary IV regressions and their relationships with various more classic test procedures are examined. Simulation experiments are designed by solving the data generating process parameters from salient econometric features, namely: degree of simultaneity and multicollinearity of regressors, and individual and joint strength of external instrumental variables. Thus, for various test implementations, a wide class of relevant cases is scanned for flaws in performance regarding type I and II errors. Substantial size distortions occur, but these can be cured remarkably well through bootstrapping, except when instruments are weak. The power of the subset tests is such that they establish an essential addition to the well-known classic full-set DWH tests in a data based classification of individual explanatory variables.

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File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2012/2012-08.pdf
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Bibliographic Info

Paper provided by Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre in its series Economic Growth centre Working Paper Series with number 1208.

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Length: 41 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:nan:wpaper:1208

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Related research

Keywords: bootstrapping; classification of explanatories; DWH orthogonality tests; test implementation; test performance; simulation design;

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Cited by:
  1. Doko Tchatoka, Firmin & Dufour, Jean-Marie, 2012. "Identification-robust inference for endogeneity parameters in linear structural models," MPRA Paper 40695, University Library of Munich, Germany.

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