Question: (Simultaneous Equations) Reconsider the market model of Example 20.2 (Simultaneous Equations, p. 492). GMM and the moment equations (a) Given that the 2SLS estimator is

(Simultaneous Equations) Reconsider the market model of Example 20.2

(Simultaneous Equations, p. 492). GMM and the moment equations

E[]=0 where the elements of z, are a basis for [xand En=9xxxl

(a) Given that the 2SLS estimator is consistent and asymptotically normal, explain how to test the overidentifying restrictions.

(b) Suppose in addition that some of the variables in Xain have coefficients equal to zero. In other words, these particular instrumental variables are uncorrelated with ds. Show that the exclusion of the corresponding moment equations increases the power of the test of overidentifying restrictions.

E[]=0 where the elements of z, are a basis for [xand En=9xxxl - B2 PR.

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