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Inference with Weak Instruments

Citation:

Stock J, Andrews D. Inference with Weak Instruments. In: Blundell R, Newey WK, Persson T Advances in Economics and Econometrics, Theory and Applications: Ninth World Congress of the Econometric Society, Vol III. Cambridge: Cambridge University Press ; 2005.
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Abstract:

This paper reviews recent developments in methods for dealing with weak instru-
ments (IVs) in IV regression models. The focus is more on tests (and confidence
intervals derived from tests) than estimators.
The paper also presents new testing results under “many weak IV asymptotics,”
which are relevant when the number of IVs is large and the coefficients on the IVs
are relatively small. Asymptotic power envelopes for invariant tests are established.
Power comparisons of the conditional likelihood ratio (CLR), Anderson-Rubin, and
Lagrange multiplier tests are made. Numerical results show that the CLR test is on
the asymptotic power envelope. This holds no matter what the relative magnitude
of the IV strength to the number of IVs.

Notes:

Prepared for the 2005 World Congress of the Econometric Society

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