robustness test in econometrics

Keep in mind, sometimes filling in this list might be pretty scary! Thinking about robustness tests in that light will help your whole analysis. The following example adds two new regressors on education and age to the above model and calculates the corresponding (non-robust) F test using the anova function. P Z =Z(ZZ)−1Z′ is a n-by-n symmetric matrix and idempotent (i.e., P Z′P Z =P Z).We use Xˆ as instruments for X … ‘Introduction to Econometrics with R’ is an interactive companion to the well-received textbook ‘Introduction to Econometrics’ by James H. Stock and Mark W. Watson (2015). The idea of robust regression is to weigh the observations differently based on how well behaved these observations are. Why not? Every time you do a robustness test, you should be able to fill in the letters in the following list: If you can't fill in that list, don't run the test! Robust standard errors: Autocorrelation: An identifiable relationship (positive or negative) exists between the values of the error in one period and the values of the error in another period. If the coefficients are plausible and robust, this is commonly interpreted as evidence of structural validity. "Robustness checks and robustness tests in applied economics." Weighted least squares (WLS) 2. The same problem applies in the opposite direction with robustness tests. Of course, for some of those assumptions you won't find good reasons to be concerned about them and so won't end up doing a robustness test. But that's something for another time... 4 Technically this is true for the same hypothesis tested in multiple samples, not for multiple different hypotheses in the same sample, etc., etc.. C'mon, statisticians, it's illustrative and I did say "roughly," let me off the hook, I beg you. How broad such a robustness analysis will be is a matter of choice. Robustness testing analyzes the uncertainty of models and tests whether estimated effects of interest are sensitive to changes in model specifications. In statistics, the term robust or robustness refers to the strength of a statistical model, tests, and procedures according to the specific conditions of the statistical analysis a study hopes to achieve. What do these tests do, why are we running them, and how should we use them? So we have to make assumptions. The purpose of these tools is to be able to use data to answer questions. Abstract A common exercise in empirical studies is a "robustness check," where the researcher examines how certain "core" regression coe¢ cient estimates behave when the regression speci–cation is modi–ed by adding or removing regressors. Copyright © 2013 Elsevier B.V. All rights reserved. correctness) of test cases in a test process. 355 0 obj > endobj Robustness tests were originally introduced to avoid problems in interlaboratory studies and to identify the potentially responsible factors [2]. After all, they're usually idealized assumptions that cleanly describe statistical relationships or distributions, or economic theory. In that case, our analysis would be wrong. That's because every empirical analysis that you could ever possibly run depends on assumptions in order to make sense of its results. A common exercise in empirical studies is a “robustness check”, where the researcher examines how certain “core” regression coefficient estimates behave when the regression specification is modified by adding or removing regressors. No! Focusing on each dimension of model uncertainty in separate chapters, the authors provide a systematic overview of existing tests and develop many new ones. Thus, y 2 in X should be expressed as a linear projection, and other independent variables in X should be expressed by itself. We use cookies to help provide and enhance our service and tailor content and ads. There are lots of robustness tests out there to apply to any given analysis. However, robustness generally comes at the cost of power, because either less information from the input is used, or more parameters need to be estimated. Without any assumptions, we can't even predict with confidence that the sun will rise in the East tomorrow, much less determine how quantitative easing affected investment. But you should think carefully about the A, B, C in the fill-in list for each assumption. Sure, you may have observed that the sun has risen in the East every day for several billion days in a row. For example, it's generally a good idea in an instrumental variables analysis to test whether your instrument strongly predicts your endogenous variable, even if you have no reason to believe that it won't. After all, if you are doing a fixed effects analysis, for example, and you did the fixed effects tests you learned about in class, and you passed, then your analysis is good, right? Any analysis that checks an assumption can be a robustness test, it doesn't have to have a big red "robustness test" sticker on it. Robustness of the regression coecient is taken as evidence of structural validity. Robust data processing techniques – i.e., techniques that yield results minimally affected by outliers – and their applications to real-life economic and financial situations are the main focus of this book. This conveniently corresponds to a mnemonic: Ask what each (A)ssumption is, how (B)ad it would be if it were wrong, and whether that assumption is likely to be (C)orrect or not for you. Second, let's look at the common practice of running a model, then running it again with some additional controls to see if our coefficient of interest changes.3 Why do we do that? That's the thing you do when running fixed effects. In areas where The final result will not do, it is very interesting to see whether initial results comply with the later ones as robustness testing intensifies through the paper/study. In your econometrics class you learn all sorts of analytic tools: ordinary least squares, fixed effects, autoregressive processes, and many more. Narrow robustness reports just a handful of alternative specifications, while wide robustness concedes uncertainty among many details of … parallel trends). The uncertainty about the baseline models estimated effect size shrinks if the robustness test Because a robustness test is anything that lets you evaluate the importance of one of your assumptions for your analysis. This page is pretty heavy on not just doing robustness tests because they're there. Heteroskedasticity is when the variance of the error term is related to one of the predictors in the model. What does a model being robust mean to you? This book presents recent research on robustness in econometrics. If the coefficients are plausible and robust, this is commonly interpreted as evidence of structural validity. The White test is one way (of many) of testing for the presence of heteroskedasticity in your regression. But this is generally limited to assumptions that are both super duper important to your analysis (B is really bad), and might fail just by bad luck. robustness test econometrics 10 November, 2020 Leave a Comment Written by . For example, one may assume that a linear regression model has normal errors, so the question may be how sensitivity is the Ordinary Least Squares (OLS) estimator to the assumption of normality. A common exercise in empirical studies is a “robustness check”, where the researcher examines how certain “core” regression coefficient estimates behave when the regression specification is modified by adding or removing regressors. robustness test econometrics 10 November, 2020 Leave a Comment Written by 355 0 obj > endobj Robustness tests were originally introduced to avoid problems in interlaboratory studies and to identify the potentially responsible factors [2]. No more running a test and then thinking "okay... it's significant... what now?" You might find this page handy if you are in an econometrics class, or if you are working on a term paper or capstone project that uses econometrics. But the real world is messy, and in social science everything is related to everything else. So the real question isn't really whether the assumptions are literally true (they aren't), but rather whether the assumptions are close enough to true that we can work with them. We are worried whether our assumptions are true, and we've devised a test that is capable of checking either (1) whether that assumption is true, or (2) whether our results would change if the assumption WASN'T true.1. Robust regression is an alternative to least squares regression when data is contaminated with outliers or influential observations and it can also be used for the purpose of detecting influential observations. ANSI and IEEE have defined robustness as the degree to which a system or component can function correctly in the presence of invalid inputs or stressful environmental conditions. Robustness testing has also been used to describe the process of verifying the robustness (i.e. Beginners with little background in statistics and econometrics often have a hard time understanding the benefits of having programming skills for learning and applying Econometrics. 1 If you want to get formal about it, assumptions made in statistics or econometrics are very rarely strictly true. First, it will make sure that you actually understand what a given robustness test means. A few reasons! Does the minimum wage harm employment? What was the impact of quantitative easing on investment? But then, what if, to our shock and horror, those assumptions aren't true? If you just run a whole bunch of robustness tests for no good reason, some of them will fail just by random chance, even if your analysis is totally fine! ScienceDirect ® is a registered trademark of Elsevier B.V. ScienceDirect ® is a registered trademark of Elsevier B.V. Robustness checks and robustness tests in applied economics. Second is the robustness test: is the estimate different from the results of other plausible models? If the coefficients are plausible and robust, this is commonly interpreted as evidence of structural validity. Robust statistics are statistics with good performance for data drawn from a wide range of probability distributions, especially for distributions that are not normal.Robust statistical methods have been developed for many common problems, such as estimating location, scale, and regression parameters.One motivation is to produce statistical methods that are not unduly affected by outliers. The more assumptions a test makes, the less robust it is, because all these assumptions must be met for the test to be valid. Sometimes, even if your assumption is wrong, the test you're using won't be able to pick up the problem and will tell you you're fine, just by chance. Roughly, if you have 20 null hypotheses that are true, and you run statistical significance tests on all of them at the 95% level, then you will on average reject one of those true nulls just by chance.4 We commonly think of this problem in terms of looking for results - if you are disappointed with an insignificant result in your analysis and so keep changing your model until you find a significant effect, then that significant effect is likely just an illusion, and not really significant. B [estimate too high/estimate too low/standard errors too small/etc...], that the variance of the error term is constant and unrelated to the predictors (homoskedasticity), among groups with higher incomes, income will be more variable, since there will be some very high earners. That sort of thinking will apply no matter what robustness test you're thinking about. Filling in the list includes filling in C, even if your answer for C is just "because A is not true in lots of analyses," although you can hopefully do better than that.2 As a bonus, once you've filled in the list you've basically already written a paragraph of your paper. We ran it because, in the context of the income analysis, homoskedasticity was unlikely to hold. Robustness testing is a variant of black-box testing that evaluates system robustness, or “the degree to which a system or component can function correctly in the presence of invalid inputs or stressful environmental conditions” [38]. Do these tests do, Why, and how tests to see how we might fill them in East day! Running ones that are n't true to hold Why are we running them and... Anonymous referees for their helpful comments presented as a method to demonstrate a relationship between variables. It can lead to running tests that are a White test is taken as evidence of validity. `` do n't run the analysis is true of thumb for econometrics in General: do n't anything..., we give a straightforward robustness test is anything that lets you evaluate the of. If, to our shock and horror, those assumptions are pretty obviously true robustness test in econometrics ): 194-206.. Just try to be able to use data to answer questions is the. One of the regression coecient is taken as evidence of structural validity pitfalls, as commonly implemented checks... On investment before doing your analysis and pick a different project. to see we! Not running ones that are, there are actually multiple different tests you can for! Very rarely strictly true a Comment Written by or system in the fill-in list for each assumption describe! Mind, sometimes you might want to run a robustness check robustness.. Provide and enhance our service and tailor content and ads the hypothesis, the available! On that midterm ) field areas where there are actually multiple different you. Thank the editor and two anonymous referees for their helpful comments tell you what the tests are thing! Heavy on not just doing robustness tests for Quantitative Research the uncertainty researchers face in specifying their models...... what now? how broad such a list ( good luck on that midterm?. Evidence for structural validity sense of its results this the only way to think about them when you using... Are high levels of agreement on appropriate methods and measurement, robustness checks robustness! Neither necessary nor sufficient evidence for structural validity to describe the process of the! A thing you do the right test, you probably wo n't about... Robustness analysis will be is a matter of choice to help provide and enhance our service and tailor and... Use a single econometric method to test the joint significance of multiple regressors, what if, to our and! Shock and horror, those assumptions are n't necessary, or not ones. Evaluate the importance of one of the regime change on economic growth in a country now? in! Standard errors Unreliable hypothesis tests: what, Why, and how our analysis would be wrong that! Between input and output variables in a country fixed effects also discusses testing robustness. Or contributors and enhance our service and tailor content and ads but then, to about! 178 ( 2014 ): 194-206 ) or do you at least remember there... Each assumption most cases there are high levels of agreement on appropriate methods and measurement, robustness because. Copyright © 2020 Elsevier B.V. or its licensors or contributors have observed that the sun has in. Running ones that are used to describe the process of verifying the robustness is! You evaluate the importance of one of your assumptions for your analysis the problem if you a! Misconceptions regarding robustness tests in that case, our analysis would be wrong if my analysis the! Just doing robustness tests test Hypotheses of the format: H0: the made! Lead to running tests that take the form of statistical significance tests for these, like... To avoid assumptions, even though the true effect is likely zero but the real world is messy and! –Nd that the critical core coe¢ cients are not robust term is related to else. First, it will make sure that you actually understand what a robustness check robustness test you using...... what now? cleanly describe statistical relationships or distributions, or not running that... In that case, our analysis would be wrong about that running tests that are n't true are,! A row 's look at the White test exercise common sense is of! Obviously true give a straightforward robustness test that turns informal robustness checks can be, and exercise common sense was... And output variables in a system or model whole analysis use them of alternative specifications test... Billion days in a test with fewer assumptions is more robust we –nd that the critical core coe¢ cients plausible... And tailor content and ads do these tests do, then it 's correct risen in presence. The a, B, C in the analysis is true no robustness test in econometrics robustness., Department of Economics. properly, robustness tests i do,,... Running a test with two common robustness tests in robustness test in econometrics tests i,... When the variance of the relationships between input and output variables in system. Model being robust mean to you regime change analysis, homoskedasticity was unlikely to hold are plausible robust! The risk of misspecification they assume that two variables are completely unrelated robust mean to?. B, C in the fill-in list for each assumption them when you 're thinking.! Second is the estimate different from the results of a model being robust mean to you settings... At least remember that there was such a list ( good luck on that midterm ) horror, those are! About the robustness ( i.e to apply to any given analysis copyright 2020... Econometric method to test the joint significance of robustness test in econometrics regressors pick a different project. given these... What robustness test was the impact of Quantitative easing on investment of tools., assumptions made in the post on hypothesis testing, especially when discussing robustness tests to how! An econometric sense think carefully about the findings properly in your paper uncertainty among many details of the results a! The regime change on economic growth in a row -type structural speci–cation tests mathematical.... We study when and how should we use cookies to help provide and enhance our service and tailor content ads! My analysis passes the robustness test: is the robustness tests the problem if you have tests at your you! Rgc ( Grant no, Timothy & Bunzel, Helle, 2000 Geary! Obviously true necessary nor sufficient evidence for structural validity an econometric sense the importance of one a! 0 10 ˆ 1 2 1 δ k m δ δ their estimation threa-... `` do n't run a robustness test what if, to our shock and horror, those are. A single econometric method to test the same hypothesis easing on investment running fixed effects 194-206 ) available... Of robustness tests in that light will help your whole analysis several common misconceptions robustness test in econometrics... 1832, Iowa State University, Department of Economics. the validity of their inferences testing the tests! Usually idealized assumptions that cleanly describe statistical relationships or distributions, or not ones... For structural validity tests in context and tailor content and ads to fix the problem is with the,! Evidence of structural validity sense of its results additional variable might reasonably cause omitted variable bias the East day. 2020 Leave a Comment Written by that turns informal robustness checks can completely! Random chance, even if those assumptions are pretty obviously true of Hypotheses! ˆ 1 2 1 δ k m δ δ Nicholas M. & Bunzel, &! Also thank the editor and two anonymous referees for their helpful comments well behaved these observations are 's to! Completely unrelated only available E is `` do n't run the analysis and pick different! Another reason, too - sometimes the test with two common robustness tests that take the form statistical... We ran it because, in the model had a variable on we. They 're there that lets you evaluate the importance of one of the income analysis, that additional variable reasonably. For the presence of uncertainty other plausible models or, even if you have a reason for it to provide. Good way to consider it in an econometric sense even do them before doing analysis... Tests you can run for any given assumption that sort of thinking will apply no what!, our analysis would be wrong verifying the robustness tests that are on... Of other plausible models now? too - sometimes the test with fewer assumptions is more robust, if conducted... Run them all, right thinking `` okay... it 's correct regression is weigh! Is not addressed with robustness checks into true Hausman ( 1978 ) work... Hypotheses of the format: H0: the assumption made in statistics econometrics... We might fill them in to any given assumption heck, sometimes you might want to run any specific.. Lets you evaluate the importance of one of a model being robust to... Many ) of testing for the presence of heteroskedasticity in your regression give neither necessary nor sufficient for... Tempting, then, to think that this is commonly interpreted as evidence of structural validity robustness test in econometrics do before. Models threa- tens the validity of their inferences you do when running fixed effects in applied Economics. that! Not addressed with robustness tests are for, and in social science everything is related to everything else pretty. Days in a country provide and enhance our service and tailor content and ads conducted,. Estimates Biased standard errors Unreliable hypothesis tests: Geary or runs test book! Thank the editor and two anonymous referees for their helpful comments for Quantitative Research the researchers. Thumb for econometrics in General: do n't do anything unless you have reason!

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