Article (Journal/Review)
Tests based on t-statistics for IV regression with weak instruments
Fecha
2014-10Registro en:
1359-8546 / 1758-6852
10.1016/j.jeconom.2014.03.012
000340335400007
Autor
Mills, Benjamin
Moreira, Marcelo J.
Vilela, Lucas Pimentel
Institución
Resumen
This paper considers tests of the parameter of an endogenous variable in an instrumental variables regression model. The focus is on one-sided conditional t-tests. Theoretical and numerical work shows that the conditional 2SLS and Fuller t-tests perform well even when instruments are weakly correlated with the endogenous variable. When the population F-statistic is as small as two, their power is reasonably close to the power envelopes for similar and non-similar tests which are invariant to rotation transformations of the instruments. This finding is surprising considering the bad performance of two-sided conditional t-tests found in Andrews et al. (2007). We show these tests have bad power because the conditional null distributions of t-statistics are asymmetric when instruments are weak. Taking this asymmetry into account, we propose two-sided tests based on t-statistics. These novel tests are approximately unbiased and can perform as well as the conditional likelihood ratio (CLR) test. (C) 2014 Elsevier B.V. All rights reserved.