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Specification tests with weak and invalid instruments

We investigate the size of the Durbin-Wu-Hausman tests for exogeneity when instrumental variables violate the strict exogeneity assumption. We show that these tests are severely size distorted even for a small correlation between the structural error and instruments. We then propose a bootstrap procedure for correcting their size. The proposed bootstrap procedure does not require identification assumptions and is also valid even for moderate correlations between the structural error and instruments, so it can be described as robust to both weak and invalid instruments.

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File URL: http://eprints.utas.edu.au/15063/1/2012-06__DP_Doko.pdf
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Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 15063.

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Length: 27 pages
Date of creation: 26 Jun 2012
Date of revision: 26 Jun 2012
Publication status: Published by the University of Tasmania. Discussion paper 2010-06
Handle: RePEc:tas:wpaper:15063
Contact details of provider: Postal: Private Bag 85, Hobart, Tasmania 7001
Phone: +61 3 6226 7672
Fax: +61 3 6226 7587
Web page: http://www.utas.edu.au/economics-finance/

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