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Specification tests with weak and invalid instruments

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Doko Tchatoka, F (2012) Specification tests with weak and invalid instruments. Discussion Paper. University of Tasmania. (Unpublished)

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Abstract

We investigate the size of the Durbin-Wu-Hausman tests for exogeneity when instrumental variables violate the strict exogeneity assumption. We show that these tests are severely size distorted even for a small correlation between the structural error and instruments. We then propose a bootstrap procedure for correcting their size. The proposed bootstrap procedure does not require identification assumptions and is also valid even for moderate correlations between the structural error and instruments, so it can be described as robust to both weak and invalid instruments.

Item Type: Report (Discussion Paper)
Keywords: Exogeneity tests; weak instruments; instrument endogeneity; bootstrap technique; RePec
Publisher: University of Tasmania
Additional Information: Discussion Paper 2012-06 - Copyright 2012 University of Tasmania
Date Deposited: 20 Sep 2012 04:20
Last Modified: 18 Nov 2014 04:42
URI: http://eprints.utas.edu.au/id/eprint/15063
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