Finance - Comparisons of methods of causal inference - Instrumental variable
3 important questions on Finance - Comparisons of methods of causal inference - Instrumental variable
What is an instrumental variable?
There is a variable that affects the dependent variable (Y) only through the endogenous variable (X)
What are the two conditions for the instrumental variable Z?
1. Internal validity: Z is correlated with x
Cov(z,x) is not 0
- Check Z test: >10
2. Exclusion restriction: Z is uncorrelated with the error term
Cov (z,e)=0
(so effect on the Y other than via X)
Cov(z,x) is not 0
- Check Z test: >10
2. Exclusion restriction: Z is uncorrelated with the error term
Cov (z,e)=0
(so effect on the Y other than via X)
What is the stata command for the IV regression?
Ivreg2 y x1 (x2=x_Z)
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