Van de Sijpe, N. orcid.org/0000-0003-0442-7020 and Windmeijer, F. (2023) On the power of the conditional likelihood ratio and related tests for weak-instrument robust inference. Journal of Econometrics, 235 (1). pp. 82-104. ISSN 0304-4076
Abstract
Power curves of the Conditional Likelihood Ratio (CLR) and related tests for testing H0:β = β0 in linear models with a single endogenous variable, y = xβ+u, estimated using potentially weak instrumental variables have been presented for two different designs. One design keeps the variance matrix of the structural and first-stage errors, Σ, constant, the other instead keeps the variance matrix of the reduced-form and first-stage errors, Ω, constant. The values of Σ govern the endogeneity features of the model. The fixed-Ω design changes these endogeneity features with changing values of β in a way that makes it less suitable for an analysis of the behaviour of the tests in low to moderate endogeneity settings, or when β and the correlation of the structural and first-stage errors, ρuv, have the same sign. At larger values of |β|, the fixed-Ω design implicitly selects values for Σ where the power of the CLR test is high. We show that the Likelihood Ratio statistic is identical to the t0(βb L) 2 statistic as proposed by Mills, Moreira, and Vilela (2014), where βb L is the LIML estimator. In fixed-Σ design Monte Carlo simulations, we find that LIMLand Fuller-based conditional Wald tests and the Fuller-based conditional t 20 test are more powerful than the CLR test when the degree of endogeneity is low to moderate. The conditional Wald tests are further the most powerful of these tests when β and ρuv have the same sign. We show that in the fixed-Ω design, setting β0 = 0 and the diagonal elements of Ω equal to 1 is not without loss of generality, unlike in the fixed-Σ design.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2022 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/). |
Keywords: | Instrumental Variables; Weak-Instrument Robust Inference; Conditional Likelihood Ratio Test; Power |
Dates: |
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Institution: | The University of Sheffield |
Academic Units: | The University of Sheffield > Faculty of Social Sciences (Sheffield) > Department of Economics (Sheffield) |
Depositing User: | Symplectic Sheffield |
Date Deposited: | 14 Feb 2022 11:03 |
Last Modified: | 27 Apr 2023 11:06 |
Status: | Published |
Publisher: | Elsevier |
Refereed: | Yes |
Identification Number: | 10.1016/j.jeconom.2022.02.004 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:183334 |