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Leverage and Covariance Matrix Estimation in Finite-Sample IV Regressions


Steinhauer, Andreas; Wuergler, Tobias (2010). Leverage and Covariance Matrix Estimation in Finite-Sample IV Regressions. Working paper series / Institute for Empirical Research in Economics No. 521, 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

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

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
JEL Classification:C12, C26
Language:English
Date:December 2010
Deposited On:29 Nov 2011 15:09
Last Modified:05 Apr 2016 15:09
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html
Permanent URL: http://doi.org/10.5167/uzh-51798

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