Question

1. Consider the following model for Bitcoin return equation:

   BTCt = β0 + β1TSXt + β2GSPCt + ut
   where BTCt, TSXt, GSPCt are the monthly return of Bitcoin, the TSX index, and S&P500 index, respectively.

   (a) We suspect that the model suffers from omitted variable bias because we have no data on consumer sentiment. Write down the procedure of Hausman test using the lagged variables T S Xt−1 and GS P Ct−1 as instruments for the two endogenous variables (TSX and GPC). (b) Is this model over-identified or just identified? Write down the procedure for J test if we have four instruments using the first two lags: TSXt−1, TSXt−2, GSP Ct−1 and GSP Ct−2

Please explain the answer step by step. Thank you!

Answer 1