Leverage and covariance matrix estimation in finite-sample IV regressions

Andreas Steinhauer and Tobias Wuergler

No 521, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: This paper develops basic algebraic concepts for instrumental variables (IV) regressions which are used to derive the leverage and influence of observations on the 2SLS estimate and compute alternative heteroskedasticity-consistent (HC1, HC2 and HC3) estimators for the 2SLS covariance matrix in a finite-sample context. Monte Carlo simulations and applications to growth regressions are used to evaluate the performance of these estimators. The results support the use of HC3 instead of White�s robust standard errors in small and unbalanced data sets. The leverage and influence of observations can be examined with the various measures derived in the paper.

Keywords: Two stage least squares; leverage; influence; heteroskedasticity-consistent covariance matrix estimation (search for similar items in EconPapers)
JEL-codes: C12 C26 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (6)

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