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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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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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File URL: http://eprints.utas.edu.au/15061/1/2012-04__DP_Doko.pdf
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Bibliographic Info

Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 15061.

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Length: 9 pages
Date of creation: 06 Jul 2012
Date of revision: 06 Jul 2012
Publication status: Published by the University of Tasmania. Discussion paper 2012-04
Handle: RePEc:tas:wpaper:15061

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Keywords: Partial exogeneity; sized distortions; weak identification;

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References

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  1. Chaudhuri, Saraswata & Rose, Elaina, 2009. "Estimating the Veteran Effect with Endogenous Schooling When Instruments Are Potentially Weak," IZA Discussion Papers 4203, Institute for the Study of Labor (IZA).
  2. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2002. "Instrumental variables and GMM: Estimation and testing," United Kingdom Stata Users' Group Meetings 2003 02, Stata Users Group.
  3. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  4. Jean-Marie Dufour, 2003. "Identification, Weak Instruments and Statistical Inference in Econometrics," CIRANO Working Papers 2003s-49, CIRANO.
  5. J. A. Hausman & W. E. Taylor, 1980. "Panel Data and Unobservable Individual Effects," Working papers 255, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. 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.
  7. Hansen, Christian & Hausman, Jerry & Newey, Whitney, 2008. "Estimation With Many Instrumental Variables," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 398-422.
  8. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
  9. 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.
  10. 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.
  11. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  12. 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.
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Cited by:
  1. Doko Tchatoka, Firmin, 2013. "On bootstrap validity for specification tests with weak instruments," MPRA Paper 47485, University Library of Munich, Germany.
  2. 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.
  3. 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.
  4. Doko Tchatoka, Firmin, 2012. "Specification tests with weak and invalid instruments," Working Papers 15063, University of Tasmania, School of Economics and Finance, revised 26 Jun 2012.
  5. Mardi Dungey & Matteo Luciani & David Veredas, 2012. "Ranking Systemically Important Financial Institutions," CAMA Working Papers 2012-47, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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