COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1741 A Specification Test for Instrumental Variables Regression with Many Instruments Yoonseok Lee and Ryo Okui December 2009 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. |
