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NON-NESTED TESTS, ENCOMPASSING AND IV ESTIMATION: EVIDENCE FROM A MONTE CARLO STUDY

Matteo Manera
Giornale degli Economisti e Annali di Economia
Nuova Serie, Anno 54, No. 7/9, TEMI ATTUALI DELLA RICERCA ECONOMETRICA (Luglio-Settembre 1995), pp. 391-413
Published by: EGEA SpA
Stable URL: http://www.jstor.org/stable/23247795
Page Count: 23
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NON-NESTED TESTS, ENCOMPASSING AND IV ESTIMATION: EVIDENCE FROM A MONTE CARLO STUDY
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Abstract

The practice of comparing alternative models is very common in applied econometrics and often involves non—nested specifications as well as instrumental variables (IV) estimation. In this paper a simple Monte Carlo exercise is designed to investigate the finite sample behaviour of three popular tests (Ericsson's, Sargan's and F test) when competing models are single equations estimated by standard IV techniques. The results are interpreted within the encompassing framework and summarized by a response surface. What emerges is that non—nested tests are not invariant to the choice of the relevant IV set in small samples.

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