QUESTION 3 a) Explain the concept of endogeneity in a regression model and how instrumental variables (IV) can help to address it. [15 MARKS] b) Discuss the conditions under which an instrumental variable is both valid and relevant. Also, describe how the IV validity can be tested. [20 MARKS] c) Based on the table below, discuss the tests carried out and explain how the results can be interpreted.

Table 9 Weak instrument tests for instrumental variables Panel A: Fraction_enroll Dependent variable: Avg ROA Chi-square/F-statistics Hausman Test 17.356*** Stock and Yogo 23.049*** Anderson-Canon 22.920*** Anderson-Rubin 21.760*** Stock-Wright Chi-square 23.220*** Sanderson-Windmeijer (SW) F-statistics 23.050*** Hansen-Sargan (P-value) 0.000*** P-value 0.100 0.000 0.000 0.120 0.000 0.000 Table 9 Weak instrument tests for instrumental variables Panel A: Fraction_enroll Dependent variable: Avg ROA Chi-square/F-statistics Hausman Test 17.356*** Stock and Yogo 23.049*** Anderson-Canon 22.920*** Anderson-Rubin 21.760*** Stock-Wright Chi-square 23.220*** Sanderson-Windmeijer (SW) F-statistics 23.050*** Hansen-Sargan (P-value) 0.000*** P-value 0.100 0.000 0.000 0.120 0.000 0.000