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On the validity of Durbin-Wu-Hausman tests for assessing partial exogeneity hypotheses with possibly weak instruments

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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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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Web page: http://www.utas.edu.au/economics-finance/

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  1. 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, 02.
  2. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2003. "Instrumental variables and GMM: Estimation and testing," Stata Journal, StataCorp LP, vol. 3(1), pages 1-31, March.
  3. DUFOUR, Jean-Marie, 2003. "Identification, Weak Instruments and Statistical Inference in Econometrics," Cahiers de recherche 2003-12, Universite de Montreal, Departement de sciences economiques.
  4. J. A. Hausman & W. E. Taylor, 1980. "Panel Data and Unobservable Individual Effects," Working papers 255, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. 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.
  6. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
  7. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  8. 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).
  9. 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.
  10. 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.
  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. 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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