IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Instrumental Variable Estimation In A Data Rich Environment

  • Bai, Jushan
  • Ng, Serena

We consider estimation of parameters in a regression model with endogenous regressors. The endogenous regressors along with a large number of other endogenous variables are driven by a small number of unobservable exogenous common factors. We show that the estimated common factors can be used as instrumental variables and they are more efficient than the observed variables in our framework. Whereas standard optimal generalized method of moments estimator using a large number of instruments is biased and can be inconsistent, the factor instrumental variable estimator (FIV) is shown to be consistent and asymptotically normal, even if the number of instruments exceeds the sample size. Furthermore, FIV remains consistent even if the observed variables are invalid instruments as long as the unobserved common components are valid instruments. We also consider estimating panel data models in which all regressors are endogenous but share exogenous common factors. We show that valid instruments can be constructed from the endogenous regressors. Although single equation FIV requires no bias correction, the faster convergence rate of the panel estimator is such that a bias correction is necessary to obtain a zero-centered normal distribution.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://journals.cambridge.org/abstract_S0266466609990727
File Function: link to article abstract page
Download Restriction: no

Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 26 (2010)
Issue (Month): 06 (December)
Pages: 1577-1606

as
in new window

Handle: RePEc:cup:etheor:v:26:y:2010:i:06:p:1577-1606_99
Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
Web page: http://journals.cambridge.org/jid_ECT
Email:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cup:etheor:v:26:y:2010:i:06:p:1577-1606_99. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.