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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

Abstract: 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)
Date: 1999
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Downloads: (external link)
http://hdl.handle.net/1866/468 (application/pdf)

Related works:
Journal Article: Semiparametric Weak-Instrument Regressions with an Application to the Risk-Return Tradeoff (2003) Downloads
Working Paper: Semi-Parametric Weak Instrument Regressions with an Application to the Risk-Return Trade-off (2002) Downloads
Working Paper: Semi-Parametric Weak Instrument Regressions with an Application to the Risk-return Trade-off (2000) Downloads
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