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ON THE ASYMPTOTIC SIZE DISTORTION OF TESTS WHEN INSTRUMENTS LOCALLY VIOLATE THE EXOGENEITY ASSUMPTION

Published online by Cambridge University Press:  13 September 2011

Patrik Guggenberger
Patrik Guggenberger*
Affiliation:
University of California San Diego
*
*Address correspondence to Patrik Guggenberger, University of California San Diego, Dept. of Economics, Room 315, 9500 Gilman Dr., La Jolla, CA 92093-0508; e-mail: pguggenberger@ucsd.edu.
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Abstract

In the linear instrumental variables model with possibly weak instruments we derive the asymptotic size of testing procedures when instruments locally violate the exogeneity assumption. We study the tests by Anderson and Rubin (1949, The Annals of Mathematical Statistics 20, 46–63), Moreira (2003, Econometrica 71, 1027–1048), and Kleibergen (2005, Econometrica 73, 1103–1123) and their generalized empirical likelihood versions. These tests have asymptotic size equal to nominal size when the instruments are exogenous but are size distorted otherwise. While in just-identified models all the tests that we consider are equally size-distorted asymptotically, the Anderson-Rubin type tests are less size-distorted than the tests of Moreira (2003) and Kleibergen in over-identified situations. On the other hand, we also show that there are parameter sequences under which the former test asymptotically overrejects more frequently. Given that strict exogeneity of instruments is often a questionable assumption, our findings should be important to applied researchers who are concerned about the degree of size distortion of their inference procedure. We suggest robustness of asymptotic size under local model violations as a new alternative measure to choose among competing testing procedures. We also investigate the subsampling and hybrid tests introduced in Andrews and Guggenberger (2010a, Journal of Econometrics 158, 285–305) and show that they do not offer any improvement in terms of size-distortion reduction over the Anderson-Rubin type tests.

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ARTICLES
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Econometric Theory , Volume 28 , Issue 2 , April 2012 , pp. 387 - 421
Copyright
Copyright © Cambridge University Press 2011

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