Question regarding Arellano-Bond, Sargen and Hansen test result in xtabond2

[Bahareh Esmaeili]

Hello everyone,

I am trying to use xtabond2 to define a GMM model. The command and results are as below.

. xtabond2 dtd L.dtd CP_1 L.(MCAP fncl_lvrg return_on_asset RE_TA cash_ratio capital_expend) gdp_gr inflation rf_rate index_return Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11 Y12 if gicscode !=5, gmmstyle(CP_1  L.(MCAP fncl_lvrg return_on_asset RE_TA  cash_ratio capital_expend) gdp_gr inflation rf_rate index_return Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11 Y12, collapse laglimits(1 1)) robust small two

Y1 dropped due to collinearity
Warning: Two-step estimated covariance matrix of moments is singular.
Using a generalized inverse to calculate optimal weighting matrix for two-step estimation.
Difference-in-Sargan/Hansen statistics may be negative.

Dynamic panel-data estimation, two-step system GMM

Group variable: firmcode                        Number of obs      =      4602
Time variable : year                            Number of groups   =       728
Number of instruments = 45                      Obs per group: min =         1
F(23, 727)    =    628.64                                      avg =      6.32
Prob > F      =     0.000                                      max =        12

Corrected
dtd       Coef.   Std. Err.      t    P>t     [95% Conf. Interval]

dtd 
L1.    .6113814   .0641396     9.53   0.000     .4854605    .7373024

CP_1    .7722729   .2079524     3.71   0.000      .364014    1.180532

MCAP 
L1.    .8041614   .2923406     2.75   0.006     .2302289    1.378094

fncl_lvrg 
L1.   -.0021833    .001279    -1.71   0.088    -.0046942    .0003276

return_on_asset 
L1.    .0199251   .0152543     1.31   0.192    -.0100226    .0498727

RE_TA 
L1.    1.767157   1.020805     1.73   0.084    -.2369213    3.771236

cash_ratio 
L1.    .2493419   .2063071     1.21   0.227     -.155687    .6543708

capital_expend 
L1.      .00002   .0001054     0.19   0.849    -.0001868    .0002269

gdp_gr   -.0164806   .0587295    -0.28   0.779    -.1317802    .0988191
inflation    .0264414   .0330959     0.80   0.425    -.0385336    .0914164
rf_rate   -.2128949   .1881392    -1.13   0.258    -.5822559    .1564661
index_return   -.0198288    .016495    -1.20   0.230    -.0522123    .0125547
Y2    1.354285   .6916206     1.96   0.051    -.0035267    2.712097
Y3    6.692027   .7168333     9.34   0.000     5.284717    8.099338
Y4    6.086134   .7779792     7.82   0.000      4.55878    7.613488
Y5    4.498718   .7205533     6.24   0.000     3.084104    5.913332
Y6    2.648962    .696054     3.81   0.000     1.282446    4.015478
Y7    3.582663   .6795954     5.27   0.000     2.248459    4.916867
Y8     8.23553    .631634    13.04   0.000     6.995486    9.475574
Y9    .4567858   .5348842     0.85   0.393    -.5933163    1.506888
Y10    5.530483   .6798649     8.13   0.000      4.19575    6.865216
Y11    -1.43245   .8068667    -1.78   0.076    -3.016517    .1516172
Y12    7.403293   .8234477     8.99   0.000     5.786674    9.019912
_cons   -15.51721   3.419655    -4.54   0.000    -22.23078   -8.803628

Instruments for first differences equation
GMM-type (missing=0, separate instruments for each period unless collapsed)
L.(CP_1 L.MCAP L.fncl_lvrg L.return_on_asset L.RE_TA L.cash_ratio
L.capital_expend gdp_gr inflation rf_rate index_return Y1 Y2 Y3 Y4 Y5 Y6
Y7 Y8 Y9 Y10 Y11 Y12) collapsed
Instruments for levels equation
Standard
_cons
GMM-type (missing=0, separate instruments for each period unless collapsed)
D.(CP_1 L.MCAP L.fncl_lvrg L.return_on_asset L.RE_TA L.cash_ratio
L.capital_expend gdp_gr inflation rf_rate index_return Y1 Y2 Y3 Y4 Y5 Y6
Y7 Y8 Y9 Y10 Y11 Y12) collapsed

Arellano-Bond test for AR(1) in first differences: z =  -4.44  Pr > z =  0.000
Arellano-Bond test for AR(2) in first differences: z =   2.51  Pr > z =  0.012

Sargan test of overid. restrictions: chi2(21)   =  31.47  Prob > chi2 =  0.066
(Not robust, but not weakened by many instruments.)
Hansen test of overid. restrictions: chi2(21)   =  31.55  Prob > chi2 =  0.065
(Robust, but weakened by many instruments.)

The results for Arellano-Bond tests for both AR (1) and (2) are significant, while both Sargen and Hansen tests are insignificant. Does it mean that instruments are invalid and the model is not correctly specified? I mean, should I necessarily reach the insigificant result for Arellano-Bond test for AR(2) and the significant result for Sargan test?

Thank you very much