Monte Carlo Methodology and the Finite Sample Properties of Instrumental Variables Statistics for Testing Nested and Non-nested Hypotheses

Neil Ericsson

Econometrica, 1991, vol. 59, issue 5, 1249-77

Abstract: Using Monte Carlo methodology, this paper investigates the effect of dynamics and simultaneity on the finite sample properties of instrumental variables statistics for testing nested and nonnested hypotheses. Simple numerical-analytical formulae (response surfaces) are obtained which closely approximate the statistics' unknown size and power functions for a dynamic simultaneous-equations model. The analysis illustrates the value and limitations of asymptotic theory in interpreting finite sample properties. Two practical results arise. The F form and the Wald statistic is favored over its chi-squared form, and "large-sigma" and small "effective" sample size strongly affect the test of over-identifying restrictions and the Cox-type test. Copyright 1991 by The Econometric Society.

Date: 1991
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