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Valid Confidence Intervals and Inference in the Presence of Weak Instruments

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Author Info
Charles R. Nelson (The University of Washington)
Richard Startz (The University of Washington)
Eric Zivot (The University of Washington)

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Abstract

We investigate confidence intervals and inference for the instrumental variables model with weak instruments. Wald-based confidence intervals perform poorly in that the probability they reject the null is far greater than their nominal size. In the worst case, Wald-based confidence intervals always exclude the true paremeter value. Confidence intervals based on the LM, LR, and Anderson-Rubin statistics perform far better than the Wald. The Anderson-Rubin statistic always has the correct size, but LM and LR statistics have somewhat greater power. Performance of the LM and LR statistics is improved by a degrees-of- freedom correction in the overidentified ccase. We show that the practice of "pre-testing" by looking at the significance of the first - stage regression leads to extremely poor results when the instruments are very weak.

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Paper provided by EconWPA in its series Econometrics with number 9612002.

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Length: 49 pages
Date of creation: 02 Dec 1996
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Handle: RePEc:wpa:wuwpem:9612002

Note: Type of Document - Adobe .pdf file; prepared on Mac; pages: 49; figures: 8, included in paper
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Related research
Keywords: confidence intervals; instrumental variables; pre-testing; weak instruments;

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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  3. Angrist, Joshua D & Krueger, Alan B, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 979-1014, November. [Downloadable!] (restricted)
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  10. Alastair R. Hall & Glenn D. Rudebusch & David W. Wilcox, 1994. "Judging instrument relevance in instrumental variables estimation," Finance and Economics Discussion Series 94-3, Board of Governors of the Federal Reserve System (U.S.).
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  11. repec:fth:harver:1435 is not listed on IDEAS
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  13. Jiahui Wang & Eric Zivot, 1996. "Inference on a Structural Parameter in Instrumental Variables Regression with Weak Instruments," Econometrics 9610005, EconWPA. [Downloadable!]
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  14. Nelson, Charles R & Startz, Richard, 1990. "Some Further Results on the Exact Small Sample Properties of the Instrumental Variable Estimator," Econometrica, Econometric Society, vol. 58(4), pages 967-76, July. [Downloadable!] (restricted)
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  15. Phillips, P.C.B., 1983. "Exact small sample theory in the simultaneous equations model," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 8, pages 449-516 Elsevier. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paul A. Bekker & Jan van der Ploeg, 2000. "Instrumental Variable Estimation Based on Grouped Data," Econometric Society World Congress 2000 Contributed Papers 1862, Econometric Society. [Downloadable!]
  2. Khalaf, Lynda & Kichian, Maral, 2003. "Are New Keynesian Phillips Curved Identified?," Cahiers de recherche 0312, GREEN. [Downloadable!]
    Other versions:
  3. Olsson, Ola, 2004. "Unbundling Ex-Colonies: A Comment on Acemoglu, Johnson, and Robinson, 2001," Working Papers in Economics 146, Göteborg University, Department of Economics. [Downloadable!]
  4. James M. Nason & Gregor W. Smith, 2005. "Identifying the New Keynesian Phillips Curve," Working Paper 2005-01, Federal Reserve Bank of Atlanta. [Downloadable!]
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  5. Ross, Stephen L. & Zenou, Yves, 2007. "Are Shirking and Leisure Substitutable? An Empirical Test of Efficiency Wages based on Urban Economic Theory," CEPR Discussion Papers 6128, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Richard Startz & Charles Nelson & Eric Zivot, 1999. "Improved Inference for the Instrumental Variable Estimator," Working Papers 0039, University of Washington, Department of Economics. [Downloadable!]
    Other versions:
  7. Manjon-Antolin, M.C., 2004. "Econometric modelling in blockholder systems of corporate governance," Discussion Paper 74, Tilburg University, Center for Economic Research. [Downloadable!]
  8. Lynda Khalaf & Maral Kichian, 2004. "Estimating New Keynesian Phillips Curves Using Exact Methods," Working Papers 04-11, Bank of Canada. [Downloadable!]
  9. David Albouy, 2006. "The Colonial Origins of Comparative Development: An Investigation of the Settler Mortality Data," Center for International and Development Economics Research, Working Paper Series 1055, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  10. H.K. Van Dijk, 2002. "On Bayesian structural inference in a simultaneous equation model," Econometric Institute Report 263, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
  11. Jinyong Hahn & Jerry Hausman & Guido Kuersteiner, 2005. "Bias Corrected Instrumental Variables Estimation for Dynamic Panel Models with Fixed E¤ects," Boston University - Department of Economics - Working Papers Series WP2005-024, Boston University - Department of Economics. [Downloadable!]
  12. Jean-Marie Dufour, 2001. "Logiques et tests d'hypothèses : réflexions sur les problèmes mal posés en économétrie," CIRANO Working Papers 2001s-40, CIRANO. [Downloadable!]
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  13. Jinyong Hahn & Atsushi Inoue, 2002. "A Monte Carlo Comparison Of Various Asymptotic Approximations To The Distribution Of Instrumental Variables Estimators," Econometric Reviews, Taylor and Francis Journals, vol. 21(3), pages 309-336. [Downloadable!] (restricted)
  14. Jun Ma & Charles Nelson & Richard Startz, 2007. "Spurious Inference in the GARCH (1,1) Model When It Is Weakly Identified," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 11(1), pages 1434-1434. [Downloadable!] (restricted)
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