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Valid Confidence Regions and Inference in the Presence of Weak Instruments

Author

Listed:
  • Eric Zivot

    (Department of Economics, University of Washington)

  • Charles R. Nelson
  • Richard Startz

Abstract

We investigate confidence intervals and inference for the instrumental variables model with weak instruments. Wald-based confidence intervals perform poorly in that the probability they reject the null is far greater than their nominal size. In the worst case, Wald-based confidence intervals always exclude the true paremeter value. Confidence intervals based on the LM, LR, and Anderson-Rubin statistics perform far better than the Wald. The Anderson-Rubin statistic always has the correct size, but LM and LR statistics have somewhat greater power. Performance of the LM and LR statistics is improved by a degrees-of-freedom correction in the overidentified ccase. We show that the practice of "pre- testing" by looking at the significance of the first -stage regression leads to extremely poor results when the instruments are very weak.

Suggested Citation

  • Eric Zivot & Charles R. Nelson & Richard Startz, 1996. "Valid Confidence Regions and Inference in the Presence of Weak Instruments," Working Papers _002, University of Washington, Department of Economics.
    • Handle: RePEc:wop:wuecwp:_002
    Note: June 1996 version
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    File URL: http://weber.u.washington.edu/~econo/faculty/weak4f96.pdf
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