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Optimal two-sided tests for instrumental variables regression with heteroskedastic and autocorrelated errors

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  • Moreira, Humberto
  • Moreira, Marcelo J.

Abstract

This paper considers two-sided tests for the parameter of an endogenous variable in an instrumental variable (IV) model with heteroskedastic and autocorrelated errors. We develop the finite-sample theory of weighted-average power (WAP) tests with normal errors and a known long-run variance. A typical weight choice yields tests with power near zero for parts of the parameter space.

Suggested Citation

  • Moreira, Humberto & Moreira, Marcelo J., 2019. "Optimal two-sided tests for instrumental variables regression with heteroskedastic and autocorrelated errors," Journal of Econometrics, Elsevier, vol. 213(2), pages 398-433.
  • Handle: RePEc:eee:econom:v:213:y:2019:i:2:p:398-433
    DOI: 10.1016/j.jeconom.2019.04.038
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    References listed on IDEAS

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    1. Marcelo Moreira & Geert Ridder, 2019. "Efficiency loss of asymptotically efficient tests in an instrumental variables regression," CeMMAP working papers CWP03/19, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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    More about this item

    Keywords

    Instrumental variables regression; Invariant tests; Optimal tests; Similar tests; Unbiased tests; Weak instruments;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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