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Filippini, Massimo
Greene, William
Kumar, Nilkanth
Martinez-Cruz, Adan
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Economics Working Paper Series 17/275
This note makes the point that, if a Bivariate Probit (BP) model is estimated on data arising from a Recursive Bivariate Probit (RBP) process, the resulting BP correlation parameter is a weighted average of the RBP correlation parameter and the parameter associated to the endogenous binary variable. Two corollaries follow this proposition: i) a zero correlation parameter in a BP model, usually interpreted as evidence of independence between the binary variables under study, may actually mask the presence of a RBP process; and ii) the interpretation of the correlation parameter in the RBP is not the same as in the BP —i.e. the RBP correlation parameter does not necessarily reflect the correlation between the binary variables under study.
Bivariate probit
Recursive Bivariate probit
Tetrachoric correlation
Monte Carlo simulation
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Working Paper
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