Tuesday, March 14, 2006

Re: st: ivreg2 error message: number of clusters must be greater than number of instruments

and I am paraphrasing or paraplagiarizing below from a private email from one of its authors.]

When you use the cluster-robust covariance matrix estimator, and the number of clusters is less than the number of instruments, then the estimated covariance matrix is not of full rank. Stata claimed at one point that this made the estimated var-cov matrix unusable--the clusters are like observations, and so it is a bit like running a regression with more regressors than observations.

It is definitely the case that you can't test at least some sets of hypotheses in these circumstances--e.g you can't do an F-test of the joint significance of all the regressors. Try this with official Stata and you will see that the F-statistic for the estimator is missing and there is a hyperlink to -help j_robustsingular-. This includes the following statement:

"There is no mechanical problem with your model, but you need to consider carefully whether any of the reported standard errors mean anything. The theory that justifies the standard error calculation is asymptotic in the number of clusters, and we have just established that you are estimating at least as many parameters as you have clusters.

Putting that concern aside, the model test statistic issue is that you cannot simultaneously test that all coefficients are zero because there is insufficient information. You could test a subset, but not all, and so Stata refuses to report the overall model test statistic."

So it _may be_ that the reported var-cov matrix is OK for at least some purposes, even though it isn't of full rank...

[end paraplagiarism]

If you think so, you can hack into the guts of -ivreg2- (comment out line 1574 to start) and save a new copy called ivreg2b.ado or somesuch, or you can run -ivreg- if you don't want the added functionality of -ivreg2-.

ps. The record of official Stata positions on the dangers of the less-than-full-rank cov matrix available at http://web.archive.org/web/*/http://www.stata.com/support/faqs/stat/aregclust.html is worth reading, IMHO.

On 3/14/06, Albrecht Glitz <aglitz@gmx.de> wrote: > I am trying to estimate an IV model with a large number of exogenous > interaction terms and one endogenous variable that I instrument. Using > ivreg2 (for the additional output it offers) I get the above error message, > however, using ivreg works fine. > > Does anyone know what to do and whether I would be doing something > wrong using the old ivreg command? > > Your advice would be greatly appreciated.

* * For searches and help try: * http://www.stata.com/support/faqs/res/findit.html * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/


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