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it is used in the case when the initial assumptions about x and error term do not hold. e.g. if x and error are correlated, we need an IV that is highly correlated with x but uncorrelated with error, say z. then two stage least square applies, 1st, regress x on z to get x hat; 2nd regree y on x hat....

hi, does anyone know how to choose the critical value for ENC-NEW test? I hv been reading the literature written by Clark and McCracken (2000) "Test of Equal Forecast Accuracy and Encompassing for Nested Models". but, i still hv no idea abt the table. there is k2 (no. of independent regres...