A Test for Kronecker Product Structure Covariance Matrix

Patrik Guggenberge, Frank Kleibergen and Sophocles Mavroeidis

No 962, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: We propose a test for a covariance matrix to have Kronecker Product Structure (KPS). KPS implies a reduced rank restriction on a certain transformation of the covariance matrix and the new procedure is an adaptation of the Kleibergen and Paap (2006) reduced rank test. To derive the limiting distribution of the Wald type test statistic proves challenging partly because of the singularity of the covariance matrix estimator that appears in the weighting matrix. We show that the test statistic has a ? 2 limiting null distribution with degrees of freedom equal to the number of restrictions tested. Local asymptotic power results are derived. Monte Carlo simulations reveal good size and power properties of the test. Re-examining fifteen highly cited papers conducting instrumental variable regressions, we find that KPS is not rejected in 56 out of 118 specifications at the 5% nominal size.

Date: 2022-01-26
New Economics Papers: this item is included in nep-ets and nep-ore
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Related works:
Journal Article: A test for Kronecker Product Structure covariance matrix (2023)
Working Paper: A Test for Kronecker Product Structure Covariance Matrix (2022)
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