Instrumental Variable Regression - Quant Trader Interview Question
Difficulty: Hard
Category: Statistics & Regression
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Topics: instrumental variables, endogeneity, regression, 2SLS, statistics
Problem Description
You are building a regression model to predict the price of a stock (Y) based on the trading volume (X). However, you suspect that the trading volume might be affected by unobserved factors (like news sentiment) that also influence the stock price. This creates a potential endogeneity problem.
Under what circumstances is the use of an instrumental variable (IV) approach, such as two-stage least squares (2SLS), necessary to obtain consistent estimates of the effect of trading volume on the stock
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