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Testing overidentifying restrictions with many instruments and heteroskedasticity

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Listed:
  • Chao, John C.
  • Hausman, Jerry A.
  • Newey, Whitney K.
  • Swanson, Norman R.
  • Woutersen, Tiemen

Abstract

This paper gives a test of overidentifying restrictions that is robust to many instruments and heteroskedasticity. It is based on a jackknife version of the overidentifying test statistic. Correct asymptotic critical values are derived for this statistic when the number of instruments grows large, at a rate up to the sample size. It is also shown that the test is valid when the number of instruments is fixed and there is homoskedasticity. This test improves on recently proposed tests by allowing for heteroskedasticity and by avoiding assumptions on the instrument projection matrix. This paper finds in Monte Carlo studies that the test is more accurate and less sensitive to the number of instruments than the Hausman–Sargan or GMM tests of overidentifying restrictions.

Suggested Citation

  • Chao, John C. & Hausman, Jerry A. & Newey, Whitney K. & Swanson, Norman R. & Woutersen, Tiemen, 2014. "Testing overidentifying restrictions with many instruments and heteroskedasticity," Journal of Econometrics, Elsevier, vol. 178(P1), pages 15-21.
    • Handle: RePEc:eee:econom:v:178:y:2014:i:p1:p:15-21
    DOI: 10.1016/j.jeconom.2013.08.003
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    More about this item

    Keywords

    Heteroskedasticity; Instrumental variables; Specifications tests; Overidentification tests; Weak instruments; Many instruments;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models

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