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Valid Confidence Intervals and Inference in the Presence of Weak Instruments

Author

Listed:
  • Charles R. Nelson

    (The University of Washington)

  • Richard Startz

    (The University of Washington)

  • Eric Zivot

    (The University of Washington)

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

  • Charles R. Nelson & Richard Startz & Eric Zivot, 1996. "Valid Confidence Intervals and Inference in the Presence of Weak Instruments," Econometrics 9612002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpem:9612002
    Note: Type of Document - Adobe .pdf file; prepared on Mac; pages: 49; figures: 8, included in paper
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    References listed on IDEAS

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    More about this item

    Keywords

    confidence intervals; instrumental variables; pre-testing; weak instruments;
    All these keywords.

    JEL classification:

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

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