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Rate Optimal Specification Test When the Number of Instruments is Large

Kohtaro Hitomi (), Masamune Iwasawa () and Yoshihiko Nishiyama ()
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Kohtaro Hitomi: Kyoto Institute of Technology
Yoshihiko Nishiyama: Institute of Economic Research, Kyoto University

No 986, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We propose a rate optimal specification test for instrumental variable regression models based on the nearest neighbor observation with respect to instruments. The proposed test has uniform power against a set of non-smooth alternatives. The optimal minimax rate is n-1/4 for any dimension of instruments, where n is sample size. This rate coincides with the fastest possible rate achievable by any tests under the local alternative setting when the alternative is constructed by a non-smooth function and/or the dimension of the instrument is large. Since such local alternative belongs to the set of alternatives considered in this study, our test is preferable in a large dimension setting. In the simulation and empirical applications with a large dimension of instruments, we observe that the test works well and the power approaches one reasonably fast as the sample size increase.

Keywords: instrumental variable model; specification test; minimax approach; k- nearest neighbor method (search for similar items in EconPapers)
JEL-codes: C12 C14 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2018-03
New Economics Papers: this item is included in nep-ecm
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