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The validity of instruments revisited

Daniel Berkowitz (), Mehmet Caner () and Ying Fang ()

Journal of Econometrics, 2012, vol. 166, issue 2, 255-266

Abstract: This paper shows how valid inferences can be made when an instrumental variable does not perfectly satisfy the orthogonality condition. When there is a mild violation of the orthogonality condition, the Anderson and Rubin (1949) test is oversized. In order to correct this problem, the fractionally resampled Anderson–Rubin test is derived by modifying Wu’s (1990) resampling technique. We select half of the sample when resampling and obtain valid but conservative critical values. Simulations show that our technique performs well even with moderate to large violation of exogeneity when there is a finite sample correction for the block size choice.

Keywords: Berry–Esseen bound; Finite sample of random variables; Near-exogeneity (search for similar items in EconPapers)
JEL-codes: C13 C3 C30 (search for similar items in EconPapers)
Date: 2012
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Working Paper: The Validity of Instruments Revisited (2013) Downloads
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DOI: 10.1016/j.jeconom.2011.09.038

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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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