Testing overidentifying restrictions with many instruments and heteroskedasticity

John C. Chao; Jerry A. Hausman; Whitney K. Newey; Norman R. Swanson; Tiemen Woutersen

doi:10.1016/j.jeconom.2013.08.003

Testing overidentifying restrictions with many instruments and heteroskedasticity

John C. Chao, Jerry A. Hausman, Whitney K. Newey, Norman R. Swanson, Tiemen Woutersen

Research output: Contribution to journal › Article › peer-review

20 Scopus citations

Abstract

This paper gives a test of overidentifying restrictions that is robust to many instruments and heteroskedasticity. It is based on a jackknife version of the overidentifying test statistic. Correct asymptotic critical values are derived for this statistic when the number of instruments grows large, at a rate up to the sample size. It is also shown that the test is valid when the number of instruments is fixed and there is homoskedasticity. This test improves on recently proposed tests by allowing for heteroskedasticity and by avoiding assumptions on the instrument projection matrix. This paper finds in Monte Carlo studies that the test is more accurate and less sensitive to the number of instruments than the Hausman-Sargan or GMM tests of overidentifying restrictions.

Original language	English (US)
Pages (from-to)	15-21
Number of pages	7
Journal	Journal of Econometrics
Volume	178
Issue number	PART 1
DOIs	https://doi.org/10.1016/j.jeconom.2013.08.003
State	Published - Jan 2014
Externally published	Yes

Keywords

Heteroskedasticity
Instrumental variables
Many instruments
Overidentification tests
Specifications tests
Weak instruments

ASJC Scopus subject areas

Economics and Econometrics

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abstract = "This paper gives a test of overidentifying restrictions that is robust to many instruments and heteroskedasticity. It is based on a jackknife version of the overidentifying test statistic. Correct asymptotic critical values are derived for this statistic when the number of instruments grows large, at a rate up to the sample size. It is also shown that the test is valid when the number of instruments is fixed and there is homoskedasticity. This test improves on recently proposed tests by allowing for heteroskedasticity and by avoiding assumptions on the instrument projection matrix. This paper finds in Monte Carlo studies that the test is more accurate and less sensitive to the number of instruments than the Hausman-Sargan or GMM tests of overidentifying restrictions.",

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