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Semi-Parametric Weak Instrument Regressions with an Application to the Risk-return Trade-off

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Author Info
Benoit Perron (Universite de Montreal)

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Abstract

Recent work shows that a low correlation between the instruments and the included variables leads to serious inference problems. We extend the local-to-zero analysis of models with weak instruments to models with estimated instruments and regressors and with higher-order dependence between instruments and disturbances. This makes this framework applicable to linear models with expectation variables that are estimated non-parametrically. Two examples of such models are the risk-return trade-off in finance and the impact of inflation uncertainty on real economic activity. Using more robust LM confidence intervals leads us to conclude that no statistically significant risk premium is present in returns on the S&P 500 index, excess holding yields between 6-month and 3-month Treasury bills, or in yen-dollar spot returns.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1576.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1576

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  1. Sentana, Enrique & Wadhwani, Sushil, 1991. "Semi-parametric Estimation and the Predictability of Stock Market Returns: Some Lessons from Japan," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 547-63, May. [Downloadable!] (restricted)
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  4. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December. [Downloadable!] (restricted)
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  5. Nelson, Charles R & Startz, Richard, 1990. "The Distribution of the Instrumental Variables Estimator and Its t-Ratio When the Instrument Is a Poor One," Journal of Business, University of Chicago Press, vol. 63(1), pages S125-40, January. [Downloadable!] (restricted)
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  6. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
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  7. Andrews, Donald W K, 1994. "Asymptotics for Semiparametric Econometric Models via Stochastic Equicontinuity," Econometrica, Econometric Society, vol. 62(1), pages 43-72, January. [Downloadable!] (restricted)
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  10. Dufour, J.M., 1995. "Some Impossibility Theorems in Econometrics with Applications to Instrumental Variables, Dynamic Models and Cointegration," Cahiers de recherche 9539, Universite de Montreal, Departement de sciences economiques. [Downloadable!]
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  11. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March. [Downloadable!] (restricted)
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  13. Hall, Alastair R & Rudebusch, Glenn D & Wilcox, David W, 1996. "Judging Instrument Relevance in Instrumental Variables Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 283-98, May.
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  14. repec:cup:etheor:v:11:y:1995:i:3:p:560-96 is not listed on IDEAS
  15. James H. Stock & Jonathan Wright, 2000. "GMM with Weak Identification," Econometrica, Econometric Society, vol. 68(5), pages 1055-1096, September.
  16. Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November. [Downloadable!] (restricted)
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  17. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  18. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February. [Downloadable!] (restricted)
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  21. Backus, David K & Gregory, Allan W, 1993. "Theoretical Relations between Risk Premiums and Conditional Variances," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 177-85, April.
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