Semi-Parametric Weak Instrument Regressions with an Application to the Risk-Return Trade-off
Benoit Perron ()
Cahiers de recherche from Universite de Montreal, Departement de sciences economiques
Recent work shows that a low correlation between the instruments and the included variables leads to serious inference problems. We extend the local-to-zero analysis of models with weak instruments to models with estimated instruments and regressors and with higher-order dependence between instruments and disturbances. This makes this framework applicable to linear models with expectation variables that are estimated non-parametrically. Two examples of such models are the risk-return trade-off in finance and the impact of inflation uncertainty on real economic activity. Results show that inference based on Lagrange Multiplier (LM) tests is more robust to weak instruments than Wald-based inference. Using LM confidence intervals leads us to conclude that no statistically significant risk premium is present in returns on the S&P 500 index, excess holding yields between 6-month and 3-month Treasury bills, or in yen-dollar spot returns.
Keywords: instrumental variables; weak instruments; local-to-zero analysis; LM tests; Wald tests; risk emium; exctations; semi-rametric models; kernels; neural networks (search for similar items in EconPapers)
JEL-codes: C23 C50 C53 C45 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Journal Article: Semiparametric Weak-Instrument Regressions with an Application to the Risk-Return Tradeoff (2003)
Working Paper: Semi-Parametric Weak Instrument Regressions with an Application to the Risk-Return Trade-off (2002)
Working Paper: Semi-Parametric Weak Instrument Regressions with an Application to the Risk-return Trade-off (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:9901
Access Statistics for this paper
More papers in Cahiers de recherche from Universite de Montreal, Departement de sciences economiques Contact information at EDIRC.
Bibliographic data for series maintained by Sharon BREWER ().