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

Jan Kiviet and Milan Pleus

Econometrics and Statistics, 2017, vol. 2, issue C, 1-21

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.

Keywords: Bootstrapping; Regressor classification; DWH orthogonality tests; Test implementation; Test performance; Simulation design (search for similar items in EconPapers)
JEL-codes: C01 C12 C15 C50 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: The performance of tests on endogeneity of subsets of explanatory variables scanned by simulation (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosta:v:2:y:2017:i:c:p:1-21

DOI: 10.1016/j.ecosta.2017.01.001

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