Efficiency Gains by Modifying GMM Estimation in Linear Models under Heteroskedasticity

Jan Kiviet and Qu Feng

No 1413, Economic Growth Centre Working Paper Series from Nanyang Technological University, School of Social Sciences, Economic Growth Centre

Abstract: While coping with nonsphericality of the disturbances, standard GMM suffers from a blind spot for exploiting the most e¤ective instruments when these are ob- tained directly from unconditional rather than conditional moment assumptions. For instance, standard GMM counteracts that exogenous regressors are used as their own optimal instruments. This is easily seen after transmuting GMM for linear models into IV in terms of transformed variables. It is demonstrated that modified GMM (MGMM), exploiting straight-forward modifications of the instru- ments, can achieve substantial efficiency gains and bias reductions, even under mild heteroskedasticity. Feasible MGMM implementations and their standard er- ror estimates are examined and compared with standard GMM and IV for a range of typical models for cross-section data, both by simulation and by empirical il- lustration.

Keywords: efficiency; generalized method of moments; instrument strength; non-spherical disturbances; (un)conditional moment assumptions (search for similar items in EconPapers)
JEL-codes: C01 C13 C26 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014-11
New Economics Papers: this item is included in nep-ecm and nep-sea
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Efficiency Gains by Modifying GMM Estimation in Linear Models under Heteroskedasticity (2014)
Working Paper: Efficiency Gains by Modifying GMM Estimation in Linear Models under Heteroskedasticity (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:nan:wpaper:1413

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