Valid Confidence Intervals and Inference in the Presence of Weak Instruments

Charles Nelson, Richard Startz and Eric Zivot ()

Econometrics from University Library of Munich, Germany

Abstract: We investigate confidence intervals and inference for the instrumental variables model with weak instruments. Wald-based confidence intervals perform poorly in that the probability they reject the null is far greater than their nominal size. In the worst case, Wald-based confidence intervals always exclude the true paremeter value. Confidence intervals based on the LM, LR, and Anderson-Rubin statistics perform far better than the Wald. The Anderson-Rubin statistic always has the correct size, but LM and LR statistics have somewhat greater power. Performance of the LM and LR statistics is improved by a degrees-of- freedom correction in the overidentified ccase. We show that the practice of "pre-testing" by looking at the significance of the first - stage regression leads to extremely poor results when the instruments are very weak.

Keywords: confidence intervals; instrumental variables; pre-testing; weak instruments (search for similar items in EconPapers)
JEL-codes: C12 C30 (search for similar items in EconPapers)
Pages: 49 pages
Date: 1996-12-02
Note: Type of Document - Adobe .pdf file; prepared on Mac; pages: 49; figures: 8, included in paper
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Journal Article: Valid Confidence Intervals and Inference in the Presence of Weak Instruments (1998)
Working Paper: Valid Confidence Intervals and Inference in the Presence of Weak Instruments (1997)
Working Paper: Valid Confidence Intervals and Inference in the Presence of Weak Instruments (1997)
Working Paper: Valid Confidence Intervals and Inference in the Presence of Weak Instruments (1996)
Working Paper: Valid Confidence Intervals and Inference in the Presence of Weak Instruments (1996)
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