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Identification
Identification
Identification
March 8, 2009
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Standard tests
Standard inference comes directly from the asymptotic normality result
d
n (g 0 ) N (0, AV(g ))
Then, it is easy to see that
Under H0 : k = k0
tk =
gk k0 p
nq
N (0, 1)
c gk )
AV(
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Overidentification: Prelude
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
1X
zi (yi x0i b) = 0
n
i=1
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
1 X
B
zi (yi x0i b) = 0
n
i=1
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
X 0Z
Z 0 u(b)
Wn
=0
n
n
which can be seen as the sample counterpart of:
E[xi zi0 ] W E[zi ui (0 )] = 0
| {z } | {z }
Kp
p1
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
p1
Then
GMM is choosing a particular way of linearly combining the p
moment conditions so the system becomes exactly identified.
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Then
F (F 0 F )1 F 0 h = 0,
forms a system of K linearly independent equations with K
unkowns.
Now note since F (F 0 F )1 F 0 has rank K, F (F 0 F )1 F 0 h = 0
whenever
F 0h = 0
which are the MM conditions derived from the GMM procedure.
This leds us to a very important result.
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
J(g ) = n h
1/20
J(g ) = n h
h
i
0
= n h (Pf n + Mf n )h
h
i
0 Pf n h
+h
0 Mf n h
= n h
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
i
h
+h
0 Mf n h
0 Pf n h
J(g ) = n h
= 0, which leds to a
The FOC of the GMM problem sets Pf n h
very useful intuituion about how GMM works and its usefulness for
testing:
The GMM estimator satisfies strictly the identifying
restrictions and tries to make the overidentifying restrictions
as small as possible.
0 Mf n h
measures how far
The minimized value of J(g ) = n h
is the sample from satisfying the overidentifying restrictions.
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
First note that the test uses the optimal GMM estimator, that
is, Wn = Sn1 .
Intuition: the J test checks if the GMM is small. According
to our previous result, this means checking if the
overidentifying restrictions are small.
Under the null that the model is correctly specified (all GMM
assumptions hold), GMM is consistent and hence the
overidentifying restrictions should be close to zero.
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
u(n )0 Z 1 Z 0 u(i )
Sn
n
n
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
0 Mf n h
Jn (g ) = n h
Wn1/2 Z u(g ) , so
with h
n
)0
(
)
(
0
0
1/2 Z u(g )
1/2 Z u(g )
Mf n W n
Jn = Wn
n
n
0
N (0, S).
n
1/2
If Wn = Sn1 and Wn
Wn1/2
= S1/2
Z 0 u(g )
Z 0 u(g ) d
= S1/2
N (O, Ip )
n
n
Walter Sosa-Escudero
Standard tests
Identification and Overidentification
Testing Overidentifying Restrictions
Recall that if y N (0, Ip ) and A is an idempotent matrix with rank q, then y 0 Ay 2 (q) (Hayashi (2000,
p. 37)).
Walter Sosa-Escudero