A Specification Test for Instrumental Variables Regression with Many Instruments

Yoonseok Lee and Ryo Okui

No 1741, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper considers specification testing for instrumental variables estimation in the presence of many instruments. The test proposed is a modified version of the Sargan (1958, Econometrica 26(3): 393-415) test of overidentifying restrictions. The test statistic asymptotically follows the standard normal distribution under the null hypothesis of correct specification when the number of instruments increases with the sample size. We find that the new test statistic is numerically equivalent up to a sign to the test statistic proposed by Hahn and Hausman (2002, Econometrica 70(1): 163-189). We also assess the size and power properties of the test.

Keywords: Instrumental variables estimation; Many instruments; Overidentifying restrictions test; Specification test (search for similar items in EconPapers)
JEL-codes: C12 C21 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2009-12
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (5)

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