On a generalization of the test of endogeneity in a two stage least squares estimation

Ayyub Sheikhi, Fatemeh Bahador and Mohammad Arashi

Journal of Applied Statistics, 2022, vol. 49, issue 3, 709-721

Abstract: In situations that the predictors are correlated with the error term, we propose a bridge estimator in the two-stage least squares estimation. We apply this estimator to overcome the multicollinearity and sparsity of the explanatory variables, when the endogeneity problem is present.The proposed estimator was applied to modify the Durbin-Wu-Hausman (DWH) test of endogeneity in the presence of multicollinearity. To compare our modified test with the existing DWH for detection of an endogenous problem in multi-collinear data, some numerical assessments are carried out. The numerical results showed that the proposed estimators and the suggested test perform better for the multi-collinear data. Finally, a genetical data set is applied for illustration the our results by estimating the coefficients parameters in the presence of endogeneity and multicollinearity.

Date: 2022
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DOI: 10.1080/02664763.2020.1837084

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