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Valid Confidence Intervals and Inference in the Presence of Weak Instruments

  • Charles R. Nelson

    (The University of Washington)

  • Richard Startz

    (The University of Washington)

  • Eric Zivot

    (The University of Washington)

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.

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Paper provided by EconWPA in its series Econometrics with number 9612002.

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Length: 49 pages
Date of creation: 02 Dec 1996
Date of revision:
Handle: RePEc:wpa:wuwpem:9612002
Note: Type of Document - Adobe .pdf file; prepared on Mac; pages: 49; figures: 8, included in paper
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Dufour, J.M., 1995. "Some Impossibility Theorems in Econometrics with Applications to Instrumental Variables, Dynamic Models and Cointegration," Cahiers de recherche 9539, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  3. Bowden,Roger J. & Turkington,Darrell A., 1990. "Instrumental Variables," Cambridge Books, Cambridge University Press, number 9780521385824.
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  9. Phillips, P.C.B., 1983. "Exact small sample theory in the simultaneous equations model," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 8, pages 449-516 Elsevier.
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  13. Jiahui Wang & Eric Zivot, 1996. "Inference on a Structural Parameter in Instrumental Variables Regression with Weak Instruments," Econometrics 9610005, EconWPA.
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