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Testing endogeneity with high dimensional covariates

Zijian Guo, Hyunseung Kang, T. Tony Cai and Dylan S. Small

Journal of Econometrics, 2018, vol. 207, issue 1, 175-187

Abstract: Modern, high dimensional data has renewed investigation on instrumental variables (IV) analysis, primarily focusing on estimation of effects of endogenous variables and putting little attention towards specification tests. This paper studies in high dimensions the Durbin–Wu–Hausman (DWH) test, a popular specification test for endogeneity in IV regression. We show, surprisingly, that the DWH test maintains its size in high dimensions, but at an expense of power. We propose a new test that remedies this issue and has better power than the DWH test. Simulation studies reveal that our test achieves near-oracle performance to detect endogeneity.

Keywords: Durbin–Wu–Hausman test; Endogeneity test; High dimensions; Instrumental variable; Invalid instruments; Power function (search for similar items in EconPapers)
JEL-codes: C12 C36 (search for similar items in EconPapers)
Date: 2018
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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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