Over-identifying Restrictions Research Articles

A Heteroscedasticity-Robust Overidentifying Restriction Test with High-Dimensional Covariates

This article proposes an overidentifying restriction test for high-dimensional linear instrumental variable models. The novelty of the proposed test is that it allows the number of covariates and instruments to be larger than the sample size. The test is scale-invariant and robust to heteroscedastic errors. To construct the final test statistic, we first introduce a test based on the maximum norm of multiple parameters that could be high-dimensional. The theoretical power based on the maximum norm is higher than that in the modified Cragg-Donald test, the only existing test allowing for large-dimensional covariates. Second, following the principle of power enhancement, we introduce the power-enhanced test, with an asymptotically zero component used to enhance the power to detect some extreme alternatives with many locally invalid instruments. Finally, an empirical example of the trade and economic growth nexus demonstrates the usefulness of the proposed test.

Factors influencing the participation of Vietnamese enterprises in global value chains: Insights from the manufacturing and processing sectors

This research aims to investigate the factors that impact the participation of companies in Vietnam's Manufacturing and Processing sector in the Global Value Chain (GVC). We employ panel data analysis with a dataset of 387,994 observations from 107,125 enterprises in this industry spanning 2011-2020. Both Ordinary Least Squares (OLS) and Generalized Moment Method (GMM) are used to assess the factors affecting the industry's GVC engagement. The Arellano-Bond test checks for autoregressive processes of order one (AR(1)) or order two (AR(2)) in the model to see if the idiosyncratic error term exhibits serial correlation. The Sargan test checks for over-identifying restrictions in the statistical model. The results reveal that the ratio of large enterprises" exerts the most significant positive influence on the participation of Vietnamese enterprises in the GVCs, closely followed by "Institutional and policy environment." Conversely, HHI, TFP, and GDP growth rates show significant negative impacts. For Foreign Direct Investment (FDI), horizontal spillovers are positive and statistically significant. However, significant results also show a negative coefficient in the Backward GVC and a positive one in the Forward GVC. From these findings, we point out some important policy implications: (1) the government should strengthen favorable conditions for the participation of large enterprises and leading SMEs; (2) It is necessary to improve the institutional and policy environment and refine policies to attract FDI, especially with a focus on promoting forward linkages to facilitate greater engagement of the enterprises in the GVCs.

TRADE OPENNESS, INVESTMENT FREEDOM- SELECTED COUNTRY RISK INDICATORS, IMPACT ON FOREIGN DIRECT INVESTMENTS, A PANEL VECTOR AUTOREGRESSION MODEL APPROACH

We employ a panel vector autoregression model (PVAR) selecting as endogenous variables Foreign Direct Investments percent of GDP, Trade Openness and Investment Freedom for a database comprised of European Countries. The data are collected from the Global Economy database. We compare different PVAR models changing the input of desired lags. We test the Hansen test for over-identifying restrictions and we generate the Generalised impulse response functions. The article uses a Hahn Kuehrsteiner Panel Var estimation estimating a stationarity PVAR with fixed effects. Econometric analysis shows a significant impact of trade openness and investment freedom indicators on foreign direct investment in Europe.

The fit of dividends on investment decisions in the Vietnam capital market

This paper explores the effect of dividends on the investment decisions of listed firms in Vietnam from 2010 to 2020. The study employs quantitative research methods to demonstrate a significant effect of dividends on investment decisions. In addition, the phenomena involving endogeneity, and over-identifying restrictions are tested to ensure the reliability of the findings. The dividend-investment relationship is explained based on some theories, including the bird-in-the-hand theory, the asymmetric information theory, and the agency theory. In particular, the study focuses on an emerging market under transparent information issues, as in Vietnam.

Remittances, Trade Balance and Economic Growth in West Africa Sub-region

The impacts remittances and trade balance has on growth in West Africa sub-region was examine for the period 2007 to 2019. To this end, based on relevant theory a model was drawn. However, prior to estimation, reliability and validity of the data set was examined. This was followed by unit root test which shows that all variables attained stationarity at their first difference while Cointegration test indicated that there exists a long-run convergence among the variables. System Generalised Method of Moment estimation revealed that remittances inflows significantly and positively impact economic growth while trade balance exerted a negative and significant impact on economic growth. The over-identifying restrictions test of J-Statistics revealed that the instrument of measurement employed was valid. It was recommended among others that policy makers in West Africa should implement policies that continually encourage remittances inflow to the sub-region while ensuring that trade deficits emanates from productive investment.

Testing Overidentifying Restrictions with High-Dimensional Data and Heteroskedasticity

This paper proposes a new test of overidentifying restrictions (called the Q test) with high-dimensional data. This test is based on estimation and inference for a quadratic form of high-dimensional parameters. It is shown to have the desired asymptotic size and power properties under heteroskedasticity, even if the number of instruments and covariates is larger than the sample size. Simulation results show that the new test performs favorably compared to existing alternative tests (Chao et al., 2014; Kolesar, 2018; Carrasco and Doukali, 2021) under the scenarios when those tests are feasible or not. An empirical example of the trade and economic growth nexus manifests the usefulness of the proposed test.

The north-south divide, the euro and the world

The European north–south divide has been an issue of a long-standing debate. We employ a Global VAR model for 28 developed and developing countries to examine the interaction between the global trade imbalances and their impact within the euro-area framework. The aim is to assess the propagation mechanisms of real shocks, focusing on the interconnections among the north euro area and the south euro area. We incorporate theory-based long-run over-identifying restrictions and examine the effects of (i) non-export real output shocks, (ii) expansionary shocks and (iii) real exchange rate shocks. An expansionary policy of the north euro area and increased competitiveness in the south euro area could alleviate trade imbalances of the debtor euro area economies. From the south euro area perspective, internal devaluation decreases output but at the same time, it also reduces current account deficits. North euro area origin shocks to domestic output exert a dominant influence in the rest of the Europe and Asia.

Testing overidentifying restrictions with many instruments and heteroscedasticity using regularised jackknife IV

Summary This paper proposes a new overidentifying restrictions test in a linear model when the number of instruments (possibly weak) may be smaller or larger than the sample size n or even infinite in a heteroscedastic framework. The proposed J test combines two techniques: the jackknife method and the regularisation technique which consists in stabilising the projection matrix. We theoretically show that our new test achieves the asymptotically correct size in the presence of many instruments. The simulation results demonstrate that our modified J statistic test has better empirical properties in small samples than existing J tests. We also propose a regularised F-test to assess the strength of the instruments, which is robust to heteroscedasticity and many instruments.

HOW GOVERNMENT OUTFLOW AND PUBLIC DEBT AFFECT INFLATION: EVIDENCE FROM SEE COUNTRIES

The study aims to address public debt and government outflow affecting inflation in some of the countries of Southeast Europe, observing a combination of factors both theoretically and econometrically. The investigation included six (6) SEE countries, including the 2006-2020 timeframe, with 90 observations. The dynamic approach, the fixed effect, and the Arellano/Bond estimator were used to check the parameters considered in the study using panel data. Furthermore, the study also applied diagnostic tests such as the Sargan over-identifying restrictions and Pedroni test for cointegration. The results of the fixed effect and Arellano / Bond estimation demonstrate that public debt, current budget outflows, and capital budget outflows affect inflation, while overall budget outflows are insignificant. For further studies, it would be useful to apply other dynamic models by applying other specific factors, which will be considered as a useful contribution to the academic, research, and policy-making structures.

Testing distributional assumptions using a continuum of moments

We propose specification tests for parametric distributions that compare the potentially complex theoretical and empirical characteristic functions using the continuum of moment conditions analogue to an overidentifying restrictions test, which takes into account the correlation between influence functions for different argument values. We derive its asymptotic distribution for fixed regularization parameter and when this vanishes with the sample size. We show its consistency against any deviation from the null, study its local power and compare it with existing tests. An extensive Monte Carlo exercise confirms that our proposed tests display good power in finite samples against a variety of alternatives.

A note on a cross-sectional GMM estimator in the presence of an observable common shock

This paper studies property of a modified GMM estimator employed for a single cross-section of data that are strongly dependent due to an observed stochastic common shock. The estimator is shown to be asymptotically mixed normal. Statistical inference can be conducted with a Wald test. An overidentifying restrictions test is suggested.

Testing overidentifying restrictions with a restricted parameter space

We show that the standard test for testing overidentifying restrictions, which compares the J-statistic (Hansen, 1982) to χ2 critical values, does not control asymptotic size when the true parameter vector is allowed to lie on the boundary of the (optimization) parameter space. We also propose a modified J-statistic that, under the null hypothesis, is asymptotically χ2 distributed, such that the resulting test does control asymptotic size.

Does Mandatory Ifrs Adoption and Macroeconomic Factors Affect Cost of Equity Capital? Empirical Evidence From South African Listed Firms

Purpose: This paper investigates the collaboration of International Financial Reporting Standards (IFRS) adopted and macroeconomic variables interaction with information asymmetry, analysts following and managerial opportunism affecting the cost of equity capital, and also influence investor’s decision taking on companies in South Africa.
 Design/Approach: A sample of 49 listed Johannesburg mining and manufacturing firms was extracted from archival database of INET BFA/IRESS SA, Morningstar, and Anupedia. A leverage fixed effects panel data set of firms from 2001 to 2014 was examined, which shows that Breusch-Lagrange Multiplier tests and the test of over-identifying restrictions used, form the basis of the content analysis of the most recent IFRS effect after mandatory adoption. We used a hand-collected dataset between 2000 and 2015.
 Findings: Our findings suggest that a significant association is found between IFRS and its interactions with managerial opportunism and integrity but with a reasonable statistical effect. However, the IFRS adoption effect on the cost of equity capital of South African firms’ has no significant effect.
 Practical implications: This study reveals that most firms report more, the credibility of annual financial statements which may not be sufficient because of the qualitative data for an assessment of managerial opportunism, information asymmetry and analysts following. Of such myopia of company managers, their reputation causes agency problems and as a result, shareholders interest is mainly focused on improving reporting standards
 Originality: The research considers dual harmonizing facets: first, that the interaction with IFRS adoption and economic factors impact on the cost of equity capital may be so pathetic and obvious; and second, that IFRS moderation impacts on the cost of equity capital in Sub- Saharan African. This finding should be meaningful to managers, analysts, policymakers, and supervisory bodies in nations with similar capital structure decisions and socioeconomic systems.

The Determinants of Sovereign Risk Premium in African Countries

This paper investigates the determinants of the sovereign risk premium in African countries. We employ the dynamic fixed effects model to determine the key drivers of sovereign bond spreads. Country-specific effects are fixed and the inclusion of dummy variables using the Bai–Perron multiple structural break test is significant at a 5% level. For robustness, the time-series generalized method of moments (GMM) is used where the null hypothesis of the Sargan Test of over-identifying restrictions (OIR) and the Arellano–Bond Test of no autocorrelation are not rejected. This implies that the instruments used are valid and relevant. In addition, there is no autocorrelation in the error terms. Our results show that the exchange rate, Money supply/GDP (M2/GDP) ratio, and trade are insignificant. Furthermore, our findings indicate that public debt/GDP ratio, GDP growth, inflation rate, foreign exchange reserves, commodity price, and market sentiment are significant at a 5% and 10% level.

Estimation of linear dynamic panel data models with time‐invariant regressors

SummaryWe present a sequential approach to estimating a dynamic Hausman–Taylor model. We first estimate the coefficients of the time‐varying regressors and subsequently regress the first‐stage residuals on the time‐invariant regressors. In comparison to estimating all coefficients simultaneously, this two‐stage procedure is more robust against model misspecification, allows for a flexible choice of the first‐stage estimator, and enables simple testing of the overidentifying restrictions. For correct inference, we derive analytical standard error adjustments. We evaluate the finite‐sample properties with Monte Carlo simulations and apply the approach to a dynamic gravity equation for US outward foreign direct investment.

Inequality does Cause Underdevelopment

This paper argues that the conflicting results in the voluminous recent literature on inequality and growth are missing the big picture on inequality and long-run economic development. Consistent with the provocative hypothesis of Engerman and Sokoloff 1997 and Sokoloff and Engerman 2000, this paper confirms with cross-country data that commodity endowments predict the middle class share of income and the middle class share predicts development. The use of commodity endowments as instruments for middle class share addresses problems of measurement and endogeneity of inequality. The paper tests the mechanisms – institutions, redistributive policies, and schooling – by which the literature has argued that a higher middle class share raises per capita income. It tests the inequality hypothesis for institutional quality, redistributive policies, and schooling against other recent hypotheses in the literature. I subject the results to testing for over-identifying restrictions, reverse causality, and other checks for robustness. While finding some evidence consistent with other development fundamentals, the paper finds high inequality to independently be a large and statistically significant barrier to developing the mechanisms by which prosperity is achieved.

Bond Risk Premia and Restrictions on Risk Prices

Researchers who estimate affine term structure models often impose overidentifying restrictions (restrictions on parameters beyond those necessary for identification) for a variety of reasons. While some of those restrictions seem to have minor effects on the extracted factors and some measures of risk premia, such as the forward risk premium, they may have a large impact on other measures of risk premia that is often ignored. In this paper, we analyze how apparently innocuous overidentifying restrictions imposed on affine term structure models can lead to large differences in several measures of risk premiums.

Alternative over-identifying restriction test in the GMM estimation of panel data models

A new over-identifying restriction test in the generalized method of moments (GMM) estimation of panel data models is proposed. In contrast to the conventional over-identifying restriction test, where the sample covariance matrix of the moment conditions is used in the weighting matrix, the proposed test uses a block diagonal weighting matrix constructed from the efficient optimal weighting matrix. It is shown that the proposed test statistic asymptotically follows the weighted sum of the chi-square distribution with one degree of freedom. A detailed local power analysis is provided for dynamic panel data models, and it is demonstrated that the new test has a comparable power to the conventional J test in many cases. The Monte Carlo simulations reveal that the proposed test has a substantially better size property than the conventional test does.

Bayesian Inference for Structural Vector Autoregressions Identified by Markov-Switching Heteroskedasticity

In order to identify structural shocks that affect economic variables, restrictions need to be imposed on the parameters of structural vector autoregressive (SVAR) models. Economic theory is the primary source of such restrictions. However, only over-identifying restrictions can be tested with statistical methods which limits the statistical validation of many just-identified SVAR models. In this study, Bayesian inference is developed for SVAR models in which the structural parameters are identified via Markov-switching heteroskedasticity. In such a model, restrictions that are just-identifying in the homoskedastic case, become over-identifying and can be tested. A set of parametric restrictions is derived under which the structural matrix is globally identified and a Savage-Dickey density ratio is used to assess the validity of the identification conditions. For that purpose, a new probability distribution is defined that generalizes the beta, F, and compound gamma distributions. As an empirical example, monetary models are compared using heteroskedasticity as an additional device for identification. The empirical results support models with money in the interest rate reaction function.

Estimation and inference of dynamic structural factor models with over-identifying restrictions

This paper develops a new estimator for the impulse response functions in structural factor models with a fixed number of over-identifying restrictions. The proposed identification scheme nests the conventional just-identified recursive scheme as a special case. We establish the asymptotic distributions of the new estimator and develop test statistics for the over-identifying restrictions. Simulation results show that adding a few more over-identifying restrictions can lead to a substantial improvement in estimation accuracy for impulse response functions at both zero and nonzero horizons. We estimate the effects of a monetary policy shock using a U.S. data set. The results show that our over-identified scheme can help to detect incorrect specifications that lead to spurious impulse responses.