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Resistant Inference in Instrumental Variable Models

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  • Jens Klooster
  • Mikhail Zhelonkin

Abstract

The classical tests in the instrumental variable model can behave arbitrarily if the data is contaminated. For instance, one outlying observation can be enough to change the outcome of a test. We develop a framework to construct testing procedures that are robust to weak instruments, outliers and heavy-tailed errors in the instrumental variable model. The framework is constructed upon M-estimators. By deriving the influence functions of the classical weak instrument robust tests, such as the Anderson-Rubin test, K-test and the conditional likelihood ratio (CLR) test, we prove their unbounded sensitivity to infinitesimal contamination. Therefore, we construct contamination resistant/robust alternatives. In particular, we show how to construct a robust CLR statistic based on Mallows type M-estimators and show that its asymptotic distribution is the same as that of the (classical) CLR statistic. The theoretical results are corroborated by a simulation study. Finally, we revisit three empirical studies affected by outliers and demonstrate how the new robust tests can be used in practice.

Suggested Citation

  • Jens Klooster & Mikhail Zhelonkin, 2024. "Resistant Inference in Instrumental Variable Models," Papers 2403.16844, arXiv.org.
  • Handle: RePEc:arx:papers:2403.16844
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    References listed on IDEAS

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    1. Nelson, Charles R & Startz, Richard, 1990. "The Distribution of the Instrumental Variables Estimator and Its t-Ratio When the Instrument Is a Poor One," The Journal of Business, University of Chicago Press, vol. 63(1), pages 125-140, January.
    2. Kern, Holger Lutz & Hainmueller, Jens, 2009. "Opium for the Masses: How Foreign Media Can Stabilize Authoritarian Regimes," Political Analysis, Cambridge University Press, vol. 17(4), pages 377-399.
    3. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, July.
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