Asymptotic Theory

IModelos Lineares
Variveis Instrumentais: Teoria Assinttica
Cristine Campos de Xavier Pinto
CEDEPLAR/UFMG
Maio/2010
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Just-identication
In this special case, L = K.
The IV estimator is

IV
= +
_
1
N
Z
/
X
_
1

_
1
N
Z
/

_
Using the WLLN and Slutskys theorems
_
1
N
Z
/
X
_
1

p
M
1
ZX
Using the fact that (Y
i
, X
i
, Z
i
)
N
i =1
are i.i.d and the CLT
1
_
N
Z
/
=
1
_
N
N

i =1
Z
i

i

d
A (0, V
0
)
where
V
0
= E
_

2
i
Z
i
Z
/
i
_
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Just-identication
In this case, IV estimator is approximately normal distributed
_
N
_

IV

_

d
N
_
0, M
1
XZ
V
0
M
1
ZX
_
To do hypothesis testing, we need to get a consistent
estimator for the asymptotic variance

V =
1
N
N

i =1

2
i
Z
i
Z
/
i
where
i
= Y
i

IV
X
i
.
In this case, we can estimate the asymptotic variance of

by
\
AVar
_

IV
_
=
_
N

i =1
X
/
i
Z
i
_
1

_
N

i =1

2
i
Z
/
i
Z
i
_

_
N

i =1
Z
/
i
X
i
_
1
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Overidentication
Lets go back to the generalized instrumental variable
estimator:

GIV
_

_
=
_

/
Z
/
X
_
1

/
Z
/
Y
_
Assuming that

p

0
for some xed, full-rank (LxK) matrix
0
.
As before, using the WLLN and CLT, we can show that
_
1
N
Z
/
X
_
1

p
M
1
ZX
1
_
N
Z
/
=
1
_
N
N

i =1
Z
i

i

d
A (0, V
0
)
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Overidentication
Note that we can write

GIV
_

_
= +
_

/
Z
/
X
_
1

/
Z
/

_
so
_
N
_

GIV
_

_

_
=
_

N
i =1
Z
/
i
X
i
N
_
1

N
i =1
Z
i

i
_
N
_
and
_
N
_

GIV
_

_

_

d
A
_
0,
_

/
0
M
ZX
_
1

/
0
V
0

0
_
[M
XZ

0
]
1
_
which depends on
0
.
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Two Stage Least Squares
In the traditional case of 2SLS,

=
_
Z
/
Z
_
1
Z
/
X
and

2SLS
=
_

X
/
X
_
1

X
/
Y
where

X = Z

.
Using the WLLN, we can show that

p

0
=
_
E
_
Z
i
Z
/
i
__
1
E
_
Z
/
i
X
i
_
= M
1
ZZ
M
ZX
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Two Stage Least Squares
Substituting this in the previous formula for the asymptotic
distribution of

GIV
, we have
_
N
_

2SLS

_

d
A
_
0, C
1
DC
1
_
where
C =
_
M
XZ
M
1
ZZ
M
ZX

and
D =
_
M
XZ
M
1
ZZ
V
0
M
1
ZZ
M
ZX
_
We can estimate the asymptotic variance of

by
\
AVar
_

2SLS
_
=
_
N

i =1

X
/
i

X
i
_
1

_
N

i =1

2
i

X
/
i

X
i
_

_
N

i =1

X
/
i

X
i
_
1
To test multiple restrictions, we can use the Wald test.
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Two Stage Least Squares
Suppose we impose the homoskedasticity:
IV3: E
_

2
i
Z
i
Z
/
i
_
=
2
E
_
Z
i
Z
/
i
_
=
2
M
ZZ
Under assumption IV3, the expression for the asymptotic
variance of 2SLS simplies
_
N
_

2SLS

_

d
A
_
0,
2
_
M
XZ
M
1
ZZ
M
ZX

1
_
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Two Stage Least Squares
We can get a consistent estimator of
2
under assumptions
IV1-IV3 and full-rank of M
ZZ

2
=

N
i =1

2
i
N K
where
2
i
=
_
y
i
x
i

2SLS
_
.
Under IV1-IV3 and full-rank of M
ZZ
, a valid estimator for
the asymptotic variance of

2SLS
is
\
AVar
_

2SLS
_
=
2
_
N

i =1

X
/
i

X
i
_
1
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Two Stage Least Squares
Relative Ecient of 2SLS: Under assumptions IV1-IV3 and
full-rank assumptions of M
ZZ
,the 2SLS estimator is ecient
in the class of all instrumental variables estimators using
instruments linear in Z.
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Two Stage Least Squares
Proof: Let

be any other IV estimator using

X = Z,
where is LxK , as instruments. Lets assume that has full
rank.
For 2SLS, the instrumental variable is X
+
= Z, where
= E
_
Z
/
Z
_
1
E
_
Z
/
X
_
. Under assumptions IV1-IV3 and
full-rank of M
ZZ
asyVar
_

2SLS
_
=

2
_
M
XZ
M
1
ZZ
M
ZX

1
N
=

2
E
_
X
+
/
X
+
_
1
N
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
asyVar
_

_
=

2

/
M
ZX
_
1

/
M
ZZ

_
[M
XZ
]
1
N
=

2
E
_

X
/
X
_
1
E
_

X
/

X
_
E
_
X
/

X
_
1
N
We need to show that
E
_
X
+
/
X
+
_
E
_
X
/

X
_
E
_

X
/

X
_
1
E
_

X
/
X
_
is positive semidenite.
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
But we know that
X = P
Z
X + (I P
Z
) X
so
E
_
X
/

X
_
= E
_
X
/
P
Z

X
_
= E
_
X
+
/

X
_
We can rewrite the expression of interest as
E
_
X
+
/
X
+
_
E
_
X
+
/

X
_
E
_

X
/

X
_
1
E
_

X
/
X
+
_
= E
__
X
+


X E
_

X
/

X
_
1
E
_

X
/
X
+
_
_/
_
X
+


X E
_

X
/

X
_
1
E
_

X
/
X
+
_
__
is psd
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Two Stage Least Squares
Under Homoskedasticity, asymptotically, it always better to
use as all the instruments than discard some of them.
However, 2SLS estimators based on many overidentifying
restrictions can cause nite sample problems.
If you are NOT under homoskedasticity, more ecient
estimators are available.
Under homoskedasticity, a valid test for multiple linear
restrictions is the F-test.
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
Two Stage Least Squares
IV estimator is never unbiased, when we have at least one
endogenous explanatory variable in the model.
The IV estimator can be inconsistent if we have weak
instruments.
The magnitudes of the standard errors will depend on the
quality of the instruments
Cristine Campos de Xavier Pinto Institute
IModelos Lineares
Asymptotic Theory
References
Rudd: 20
Hayashi: 3
Wooldridge: 5
Cristine Campos de Xavier Pinto Institute
IModelos Lineares