Optimal Invariant Similar Tests for Instrumental Variables Regression

Donald W.K. Andrews, Marcelo Moreira, James H. Stock

NBER Technical Working Paper No. 299
Issued in August 2004
NBER Program(s):Technical Working Papers

This paper considers tests of the parameter on endogenous variables in an instrumental variables regression model. The focus is on determining tests that have certain optimal power properties. We start by considering a model with normally distributed errors and known error covariance matrix. We consider tests that are similar and satisfy a natural rotational invariance condition. We determine tests that maximize weighted average power (WAP) for arbitrary weight functions among invariant similar tests. Such tests include point optimal (PO) invariant similar tests. The results yield the power envelope for invariant similar tests. This allows one to assess and compare the power properties of existing tests, such as the Anderson-Rubin, Lagrange multiplier (LM), and conditional likelihood ratio (CLR) tests, and new optimal WAP and PO invariant similar tests. We find that the CLR test is quite close to being uniformly most powerful invariant among a class of two-sided tests. A new unconditional test, P*, also is found to have this property. For one-sided alternatives, no test achieves the invariant power envelope, but a new test. the one-sided CLR test. is found to be fairly close. The finite sample results of the paper are extended to the case of unknown error covariance matrix and possibly non-normal errors via weak instrument asymptotics. Strong instrument asymptotic results also are provided because we seek tests that perform well under both weak and

download in pdf format
   (1093 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/t0299

Published: Andrews, Donald W. K., Marcelo J. Moreira and James H. Stock. "Optimal Two-Sided Invariant Similar Tests For Instrumental Variables Regression," Econometrica, 2006, v74(3,May), 715-752.

Users who downloaded this paper also downloaded* these:
Stock and Yogo t0284 Testing for Weak Instruments in Linear IV Regression
Bound, Jaeger, and Baker t0137 The Cure Can Be Worse than the Disease: A Cautionary Tale Regarding Instrumental Variables
Andrews and Stock t0313 Inference with Weak Instruments
Staiger and Stock t0151 Instrumental Variables Regression with Weak Instruments
Angrist, Imbens, and Rubin t0136 Identification of Causal Effects Using Instrumental Variables
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us