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Bootstrap and Higher-Order Expansion Validity When Instruments May Be Weak

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  • Marcelo J. Moreira
  • Jack R. Porter
  • Gustavo A. Suarez

Abstract

It is well-known that size-adjustments based on Edgeworth expansions for the t-statistic perform poorly when instruments are weakly correlated with the endogenous explanatory variable. This paper shows, however, that the lack of Edgeworth expansions and bootstrap validity are not tied to the weak instrument framework, but instead depends on which test statistic is examined. In particular, Edgeworth expansions are valid for the score and conditional likelihood ratio approaches, even when the instruments are uncorrelated with the endogenous explanatory variable. Furthermore, there is a belief that the bootstrap method fails when instruments are weak, since it replaces parameters with inconsistent estimators. Contrary to this notion, we provide a theoretical proof that guarantees the validity of the bootstrap for the score test, as well as the validity of the conditional bootstrap for many conditional tests. Monte Carlo simulations show that the bootstrap actually decreases size distortions in both cases.

Suggested Citation

  • Marcelo J. Moreira & Jack R. Porter & Gustavo A. Suarez, 2004. "Bootstrap and Higher-Order Expansion Validity When Instruments May Be Weak," Harvard Institute of Economic Research Working Papers 2048, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:2048
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Guggenberger, Patrik & Smith, Richard J., 2008. "Generalized empirical likelihood tests in time series models with potential identification failure," Journal of Econometrics, Elsevier, vol. 142(1), pages 134-161, January.
    2. Davidson, Russell & MacKinnon, James G., 2010. "Wild Bootstrap Tests for IV Regression," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(1), pages 128-144.
    3. Russell Davidson & James G. MacKinnon, 2008. "Bootstrap inference in a linear equation estimated by instrumental variables," Econometrics Journal, Royal Economic Society, vol. 11(3), pages 443-477, November.
    4. Donald W.K. Andrews & James H. Stock, 2005. "Inference with Weak Instruments," Cowles Foundation Discussion Papers 1530, Cowles Foundation for Research in Economics, Yale University.
    5. Moreira, Marcelo J. & Porter, Jack R. & Suarez, Gustavo A., 2009. "Bootstrap validity for the score test when instruments may be weak," Journal of Econometrics, Elsevier, vol. 149(1), pages 52-64, April.
    6. Russell Davidson & James G. MacKinnon, 2012. "Bootstrap Confidence Sets with Weak Instruments," Working Papers 1278, Queen's University, Department of Economics.
    7. Russell Davidson & James MacKinnon, 2014. "Bootstrap Confidence Sets with Weak Instruments," Econometric Reviews, Taylor & Francis Journals, vol. 33(5-6), pages 651-675.
    8. Phillips, Garry D.A. & Liu-Evans, Gareth, 2016. "Approximating and reducing bias in 2SLS estimation of dynamic simultaneous equation models," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 734-762.
    9. Morris, Stephen D., 2017. "DSGE pileups," Journal of Economic Dynamics and Control, Elsevier, vol. 74(C), pages 56-86.
    10. Angelica Gonzalez, 2007. "Angelica Gonzalez," ESE Discussion Papers 168, Edinburgh School of Economics, University of Edinburgh.
    11. Russell Davidson & James MacKinnon, 2014. "Bootstrap Confidence Sets with Weak Instruments," Econometric Reviews, Taylor & Francis Journals, vol. 33(5-6), pages 651-675.

    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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