Hi All:

I am using system GMM method to estimate my panel data (T=6). I am new to this method. I know that the assumption of system GMM is the changes in the instrumenting variables are uncorrelated with fixed effect. But I do not know whether system GMM should rely on the AB test for AR(2). My results for AR(2) is significant. If it relies on AR(2), how should I correct it?

The following is my code:
Code:
xtabond2 mcs_abs L.mcs_abs i.RWL1 i.RWL1#i.b i.housect age i.Rmarital i.Rchild i.cfreq i.Ghealth1 i.Xoccup i.healthstress i.moneystress i.disease i.Rstate yeardum1-yeardum6, gmmstyle(mcs_abs i.RWL1, laglimits(2 4) collapse eq(level)) gmmstyle(i.RWL1#i.b i.Ghealth1 i.housect i.disease,lag(1 2) eq(level)) ivstyle(age i.Rchild i.Rmarital i.cfreq i.Xoccup i.healthstress i.moneystress i.Rstate yeardum1-yeardum6, equation(level)) twostep robust small orthogonal
The test is following:
Code:
Arellano-Bond test for AR(1) in first differences: z =  -9.51  Pr > z =  0.000
Arellano-Bond test for AR(2) in first differences: z =   3.54  Pr > z =  0.000
------------------------------------------------------------------------------
Sargan test of overid. restrictions: chi2(121)  = 145.59  Prob > chi2 =  0.063
  (Not robust, but not weakened by many instruments.)
Hansen test of overid. restrictions: chi2(121)  = 124.96  Prob > chi2 =  0.384
  (Robust, but weakened by many instruments.)

Difference-in-Hansen tests of exogeneity of instrument subsets:
  gmm(lfstfy 1b.RWL1 2.RWL1 3.RWL1 4.RWL1 5.RWL1 6.RWL1 7.RWL1 8.RWL1, collapse eq(level) 
> lag(2 4))
    Hansen test excluding group:     chi2(97)   = 107.38  Prob > chi2 =  0.221
    Difference (null H = exogenous): chi2(24)   =  17.58  Prob > chi2 =  0.823
  iv(age 0b.Rchild 1.Rchild 0b.Rmarital 1.Rmarital 0b.disease 1.disease 2.disease 0b.cfreq
>  1.cfreq 2.cfreq 3.cfreq 1b.Xoccup 2.Xoccup 3.Xoccup 1b.healthstress 2.healthstress 3.he
> althstress 4.healthstress 5.healthstress 1b.moneystress 2.moneystress 3.moneystress 4.mo
> neystress 5.moneystress 1b.Rstate 2.Rstate 3.Rstate 4.Rstate 5.Rstate 6.Rstate yeardum1 
> yeardum2 yeardum3 yeardum4 yeardum5 yeardum6, eq(level))
    Hansen test excluding group:     chi2(93)   = 109.94  Prob > chi2 =  0.111
    Difference (null H = exogenous): chi2(28)   =  15.03  Prob > chi2 =  0.978
Thank you,
Connie