Jackknife Lagrange multiplier test with many weak instruments

Yukitoshi Matsushita and Taisuke Otsu

STICERD - Econometrics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: This paper proposes a jackknife Lagrange multiplier (JLM) test for instrumental variable regression models, which is robust to (i) many instruments, where the number of instruments may increase proportionally with the sample size, (ii) arbitrarily weak instruments, and (iii) heteroskedastic errors. To the best of our knowledge, currently there is no asymptotically size correct test in this setting. Our idea is to modify the score statistic by jackknifing and to construct its heteroskedasticity robust variance estimator. Compared to Hansen, Hausman and Newey's (2008) modification for many instruments on the LM test by Kleibergen (2002) and Moreira (2001), our JLM test is robust for heteroskedastic errors and may circumvent possible decrease in the power function. Simulation results illustrate the desirable size robustness and power properties of the proposed method.

Keywords: many instruments; weak instruments; Lagrange multiplier test; jackknife (search for similar items in EconPapers)
JEL-codes: C12 C26 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-ecm and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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