I am exploring what happens when two regressors are collinear, and at least one is simultaneous with the dependent variable (which might occur, for example, when regressing unemployment and its square on crime, where crime causes unemployment and unemployment causes crime, possibly through a missing third variable). In real life such a regression makes no sense, but that will not stop people from doing it. And Stata gives a result, a strange one..
I model the general situation this way on Stata 15:
set obs 100000
g a =rnormal(10)
g b =rnormal(10
g d=rnormal(10)
g y=a+b
g x=a+d
g z=x+b*.01
reg y x z;
The result makes no sense:
Source | SS df MS Number of obs = 100,000
-------------+---------------------------------- F(2, 99997) > 99999.00
Model | 149553.241 2 74776.6205 Prob > F = 0.0000
Residual | 50081.9422 99,997 .500834447 R-squared = 0.7491
-------------+---------------------------------- Adj R-squared = 0.7491
Total | 199635.183 99,999 1.9963718 Root MSE = .7077
------------------------------------------------------------------------------
y | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
x | -99.33594 .2235979 -444.26 0.000 -99.77419 -98.8977
z | 99.8365 .2235935 446.51 0.000 99.39826 100.2747
_cons | .0064508 .0389119 0.17 0.868 -.069816 .0827176
------------------------------------------------------------------------------
The correlation between x and z is .9999.
The coefficients get higher with more collinearity, and lower with less.
I did the same regression on my 20 year old SAS. The results were completely different, with coefficients of one.
What causes the expanding coefficients in Stata?
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