New Exogeneity Tests & Causal Paths

30 Pages Posted: 11 Jul 2018

See all articles by Hrishikesh D. Vinod

Hrishikesh D. Vinod

Fordham University - Department of Economics

Date Written: July 6, 2018

Abstract

Statistically dependent X and Y have conditional density f(Y|X) asymmetrically different from unconditional f(Y). Theorem 1 com- pares two flipped kernel regressions to derive necessary conditions for causal path X --> Y and exogeneity meaning that X is self-driven. Hausman-Wu's indirect exogeneity test diagnoses a disease (endogeneity) by showing that instrumental variables (IV) estimator remedy 'works.' Instead, a unanimity index-based test aggregates evidence from four orders of stochastic dominance and new asymmetric partial correlation coefficients to determine the direction and strength of causal and exogenous variables. A simulation supports our decision rules. An illustration identifies exogenous variables which can help predict US economic recession.

Keywords: Kernel Regression, stochastic dominance, statistical independence, recesion forecasting

JEL Classification: C18, C36, C54, E37

Suggested Citation

Vinod, Hrishikesh D., New Exogeneity Tests & Causal Paths (July 6, 2018). Available at SSRN: https://ssrn.com/abstract=3206096 or http://dx.doi.org/10.2139/ssrn.3206096

Hrishikesh D. Vinod (Contact Author)

Fordham University - Department of Economics ( email )

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