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On the Validity of Durbin-Wu-Hausman Tests for Assessing Partial Exogeneity Hypotheses with Possibly Weak Instruments

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  • Doko Tchatoka, Firmin

Abstract

We investigate the validity of the standard specification tests for assessing the exogeneity of subvectors in the linear IV regression. Our results show that ignoring the endogeneity of the regressors whose exogeneity is not being tested leads to invalid tests (level is not controlled). When the fitted values from the first stage regression of these regressors are used as instruments under the partial null hypothesis of interest, as suggested Hausman and Taylor (1980, 1981), some versions of these tests are invalid when identification is weak and the number of instruments is moderate. However, all tests are overly conservative and have no power when the number of instruments increases, even for moderate identification strength.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40184.

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Date of creation: 20 Jul 2012
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Handle: RePEc:pra:mprapa:40184

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Keywords: Partial exogeneity; sized distortions; weak identification;

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  1. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-98, November.
  2. Doko Tchatoka, Firmin, 2012. "On the Validity of Durbin-Wu-Hausman Tests for Assessing Partial Exogeneity Hypotheses with Possibly Weak Instruments," MPRA Paper 40184, University Library of Munich, Germany.
  3. Firmin DOKO TCHATOKA & Jean-Marie DUFOUR, 2014. "Identification-Robust Inference for Endogeneity Parameters in Linear Structural Models," Cahiers de recherche 03-2014, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Hahn, Jinyong & Ham, John C. & Moon, Hyungsik Roger, 2011. "The Hausman test and weak instruments," Journal of Econometrics, Elsevier, vol. 160(2), pages 289-299, February.
  5. Christian Hansen & Jerry Hausman & Whitney Newey, 2006. "Estimation with many instrumental variables," CeMMAP working papers CWP19/06, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  6. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2002. "Instrumental variables and GMM: Estimation and testing," Boston College Working Papers in Economics 545, Boston College Department of Economics, revised 14 Feb 2003.
  8. DUFOUR, Jean-Marie, 2003. "Identification, Weak Instruments and Statistical Inference in Econometrics," Cahiers de recherche 10-2003, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  9. Saraswata Chaudhuri & Elaina Rose, 2009. "Estimating the Veteran Effect with Endogenous Schooling when Instruments are Potentially Weak," Working Papers UWEC-2009-07, University of Washington, Department of Economics.
  10. Jean-Marie Dufour, 2003. "Identification, Weak Instruments and Statistical Inference in Econometrics," CIRANO Working Papers 2003s-49, CIRANO.
  11. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
  12. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
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Cited by:
  1. Dungey, Mardi & Luciani, Matteo & Veredas, David, 2012. "Ranking systemically important financial institutions," Working Papers 15473, University of Tasmania, School of Economics and Finance, revised 21 Nov 2012.
  2. 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.
  3. Doko Tchatoka, Firmin, 2012. "On the validity of Durbin-Wu-Hausman tests for assessing partial exogeneity hypotheses with possibly weak instruments," Working Papers 15061, University of Tasmania, School of Economics and Finance, revised 06 Jul 2012.
  4. Doko Tchatoka, Firmin Sabro, 2012. "Specification Tests with Weak and Invalid Instruments," MPRA Paper 40185, University Library of Munich, Germany.
  5. Doko Tchatoka, Firmin, 2013. "On bootstrap validity for specification tests with weak instruments," Working Papers 16875, University of Tasmania, School of Economics and Finance, revised 05 Aug 2013.

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