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Diagnostics for IV Regressions

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  • M. Hashem Pesaran
  • Larry W. Taylor

Abstract

The use of residuals from the structural equations in a simultaneous‐ equations model can lead to misleading measures of association and to invalid diagnostic statistics for heterosedasticity and functional form misspecifications. In an important paper, Pagan and Hall (1983) suggest a few principals upon which asymptotically valid tests can be constructed, while the issue of appropriate measures of goodness‐of‐fit for IV regressions is addressed in Pesaran and Smith (1994). This paper is concerned with the optimal construction of diagnostics for IV regression, and examines the finite‐sample properties of several tests for functional form misspecifications and heteroscedasticity.

Suggested Citation

  • M. Hashem Pesaran & Larry W. Taylor, 1999. "Diagnostics for IV Regressions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(2), pages 255-281, May.
    • Handle: RePEc:bla:obuest:v:61:y:1999:i:2:p:255-281
    DOI: 10.1111/1468-0084.00128
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    1. Pesaran, M Hashem & Smith, Richard J, 1994. "A Generalized R[superscript]2 Criterion for Regression Models Estimated by the Instrumental Variables Method," Econometrica, Econometric Society, vol. 62(3), pages 705-710, May.
    2. Gerrard, W J & Godfrey, L G, 1998. "Diagnostic Checks for Single-Equation Error-Correction and Autoregressive Distributed Lag Models," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(2), pages 222-237, March.
    3. Lee, Tae-Hwy & White, Halbert & Granger, Clive W. J., 1993. "Testing for neglected nonlinearity in time series models : A comparison of neural network methods and alternative tests," Journal of Econometrics, Elsevier, vol. 56(3), pages 269-290, April.
    4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    5. Larry Taylor, 1997. "An R2criterion based on optimal predictors," Econometric Reviews, Taylor & Francis Journals, vol. 16(1), pages 109-118.
    6. Adrian R Pagan & Anthony D Hall, 1983. "Diagnostic tests as residual analysis," Published Paper Series 1983-1, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    7. Pesaran, M. Hashem & Smith, Richard J., 1990. "A unified approach to estimation and orthogonality tests in linear single-equation econometric models," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 41-66.
    8. Pagan, Adrian & Vella, Frank, 1989. "Diagnostic Tests for Models Based on Individual Data: A Survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages 29-59, Supplemen.
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