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Leverage and covariance matrix estimation in finite-sample IV regressions

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  • Andreas Steinhauer
  • Tobias Wuergler

Abstract

This paper develops basic algebraic concepts for instrumental variables (IV) regressions which are used to derive the leverage and influence of observations on the 2SLS estimate and compute alternative heteroskedasticity-consistent (HC1, HC2 and HC3) estimators for the 2SLS covariance matrix in a finite-sample context. Monte Carlo simulations and applications to growth regressions are used to evaluate the performance of these estimators. The results support the use of HC3 instead of White’s robust standard errors in small and unbalanced data sets. The leverage and influence of observations can be examined with the various measures derived in the paper.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 521.

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Date of creation: Dec 2010
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Handle: RePEc:zur:iewwpx:521

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Keywords: Two stage least squares; leverage; influence; heteroskedasticity-consistent covariance matrix estimation;

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Cited by:
  1. Maurice J.G. Bun & Teresa D. Harrison, 2014. "OLS and IV estimation of regression models including endogenous interaction terms," UvA-Econometrics Working Papers 14-02, Universiteit van Amsterdam, Dept. of Econometrics.

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