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

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  • Kiviet, Jan F.
  • Pleus, Milan

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 and critically compared with statements in the literature. Then 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. Next, 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 relatively 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. This is also illustrated in an empirical example supplemented with hints for practitioners.

Suggested Citation

  • Kiviet, Jan F. & Pleus, Milan, 2017. "The performance of tests on endogeneity of subsets of explanatory variables scanned by simulation," Econometrics and Statistics, Elsevier, vol. 2(C), pages 1-21.
  • Handle: RePEc:eee:ecosta:v:2:y:2017:i:c:p:1-21
    DOI: 10.1016/j.ecosta.2017.01.001
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    Cited by:

    1. Firmin DOKO TCHATOKA & Jean-Marie DUFOUR, 2016. "Exogeneity Tests, Incomplete Models, Weak Identification and Non-Gaussian Distributions : Invariance and Finite-Sample Distributional Theory," Cahiers de recherche 14-2016, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    2. Firmin Doko Tchatoka, 2015. "On bootstrap validity for specification tests with weak instruments," Econometrics Journal, Royal Economic Society, vol. 18(1), pages 137-146, February.
    3. Firmin Doko Tchatoka & Jean-Marie Dufour, 2016. "Exogeneity tests, weak identification, incomplete models and non-Gaussian distributions: Invariance and finite-sample distributional theory," School of Economics Working Papers 2016-01, University of Adelaide, School of Economics.
    4. Doko Tchatoka, Firmin, 2012. "Specification tests with weak and invalid instruments," Working Papers 15063, University of Tasmania, Tasmanian School of Business and Economics, revised 26 Jun 2012.
    5. Firmin Doko Tchatoka & Jean‐Marie Dufour, 2014. "Identification‐robust inference for endogeneity parameters in linear structural models," Econometrics Journal, Royal Economic Society, vol. 17(1), pages 165-187, February.
    6. Firmin DOKO TCHATOKA & Jean-Marie DUFOUR, 2016. "Exogeneity Tests, Incomplete Models, Weak Identification and Non-Gaussian Distributions : Invariance and Finite-Sample Distributional Theory," Cahiers de recherche 14-2016, Centre interuniversitaire de recherche en économie quantitative, CIREQ.

    More about this item

    Keywords

    Bootstrapping; Regressor classification; DWH orthogonality tests; Test implementation; Test performance; Simulation design;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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