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Are Nearly Exogenous Instruments Reliable?

  • Mehmet Caner
  • Dan Berkowitz
  • Ying Fang

We show that when instruments are nearly exogenous, the two stage least squares t-statistic unpredictably over-rejects or under-rejects the null hypothesis that the endogenous regressor is insignificant and Anderson-Rubin test over-rejects the null. We prove that in the limit these tests are no longer nuisance parameter free.

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Paper provided by University of Pittsburgh, Department of Economics in its series Working Papers with number 207.

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Date of creation: Jan 2006
Date of revision: Jan 2006
Handle: RePEc:pit:wpaper:207
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  19. Davidson, James, 1994. "Stochastic Limit Theory: An Introduction for Econometricians," OUP Catalogue, Oxford University Press, number 9780198774037, March.
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