Accounting for endogeneity in regression models using Copulas: A step-by-step guide for empirical studies

Posted: April 13, 2021 in Research, Research papers
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  • Papadopoulos, A (2021). “Accounting for endogeneity in regression models using Copulas: A step-by-step guide for empirical studies.” Journal of Econometric Methods, https://doi.org/10.1515/jem-2020-0007 . Download the pre-print incl. the on-line supplement.
  • Abstract : We provide a detailed presentation and guide for the use of Copulas in order to account for endogeneity in linear regression models without the need for instrumental variables. We start by developing the model from first principles of likelihood inference, and then focus on the Gaussian Copula. We discuss its merits and propose diagnostics to assess its validity. We analyze in detail and provide solutions to the various issues that may arise in empirical applications for applying the method. We treat the cases of both continuous and discrete endogenous regressors. We present simulation evidence for the performance of the proposed model in finite samples, and we illustrate its application by a short empirical study. A supplementary file contains additional simulations and another empirical illustration.

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