Monte Carlo Methodology and the Finite Sample Properties of Instrumental Variables Statistics for Testing Nested and Non-nested Hypotheses
AbstractUsing Monte Carlo methodology, this paper investigates the effect of dynamics and simultaneity on the finite sample properties of instrumental variables statistics for testing nested and nonnested hypotheses. Simple numerical-analytical formulae (response surfaces) are obtained which closely approximate the statistics' unknown size and power functions for a dynamic simultaneous-equations model. The analysis illustrates the value and limitations of asymptotic theory in interpreting finite sample properties. Two practical results arise. The F form and the Wald statistic is favored over its chi-squared form, and "large-sigma" and small "effective" sample size strongly affect the test of over-identifying restrictions and the Cox-type test. Copyright 1991 by The Econometric Society.
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Bibliographic InfoArticle provided by Econometric Society in its journal Econometrica.
Volume (Year): 59 (1991)
Issue (Month): 5 (September)
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