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From |
Adrian Stork <storkadrian@googlemail.com> |

To |
"statalist@hsphsun2.harvard.edu" <statalist@hsphsun2.harvard.edu> |

Subject |
st: Instrumental variables with estimates from odd and even months |

Date |
Wed, 5 Feb 2014 22:22:27 +0100 |

Dear all I'm trying to use an instrumental variables estimator to mitigate the Errors-in-Variables (EIV) issue but I'm a bit confused how to get there. So, my dependent variable is actually estimated from time-series regressions. Here I rergess the time-series of 50 stocks against a market index, thus resulting in 50 coefficients for each of the 50 stocks. However, to solve the EIV-issue it is argued to run these time-series regressions separately for odd and even months. I did that, so far so good, but I don't know how to implement the next step. This instrumental variables estimator is defined as: b=(^B_odd' ^B_even)^(-1) ^B' R this is almost identical to the OLS-estimator, where ^B_odd' is the transposed matrix of coefficients estimated over odd months, ^B_even is the matrix of coefficients estimated over even months. (-1) is the inverse of the resulting matrix and ^B' is B_odd' if month t is even or B_even' if month t is odd (the last point is actually the most confusing one). R is the dependet variable, i.e. again the stock return of stock i. Having said all that, the tricky part in my opinion is the ^B' which changes in odd and even months depending on t. My rather naive approach is to run the following regression in Stata to implement this instrumental approach: .ivregress 2sls R (betaeven=betaodd) I get a result and it makes very much sense, but I'm not 100% sure whether my solution is correct (especially given the changing nature of B'). Could anyone confirm that what I did (i.e. the ivregress command) is in line with above formula? From the Stata Manual I can't say for sure. Any help/suggestions are much appreciated. Best, Adrian * * For searches and help try: * http://www.stata.com/help.cgi?search * http://www.stata.com/support/faqs/resources/statalist-faq/ * http://www.ats.ucla.edu/stat/stata/

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