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    Jorge Salcedo
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    Weak instruments have a low correlation with the endogenous variable they are trying to instrument for. Tests for weak instruments include checking the correlation between a single instrument and endogenous variable, or examining the partial R-squared and F-statistic from the first stage regression when using multiple instruments. Using weak instruments undermines precision, leads to bias toward OLS estimates in small samples, and the degree of bias increases as instruments become weaker or samples get smaller.

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    Weak instruments have a low correlation with the endogenous variable they are trying to instrument for. Tests for weak instruments include checking the correlation between a single instrument and endogenous variable, or examining the partial R-squared and F-statistic from the first stage regression when using multiple instruments. Using weak instruments undermines precision, leads to bias toward OLS estimates in small samples, and the degree of bias increases as instruments become weaker or samples get smaller.

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    10 views1 page

    Instrumental Variables 10

    Uploaded by

    Jorge Salcedo
    Weak instruments have a low correlation with the endogenous variable they are trying to instrument for. Tests for weak instruments include checking the correlation between a single instrument and endogenous variable, or examining the partial R-squared and F-statistic from the first stage regression when using multiple instruments. Using weak instruments undermines precision, leads to bias toward OLS estimates in small samples, and the degree of bias increases as instruments become weaker or samples get smaller.

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    Weak Instrumental Variables

    A weak instrument has a low correlation with the endogenous variable.

    Tests for weak instruments


     In a case of one endogenous regressor and one instrument, a low correlation between
    instrument and the endogenous variable would indicate a weak instrument.
     When several instruments are used for one endogenous variable, the weakness of the
    instruments can be measured by the partial R2 and partial F-statistic from the first stage
    regression.
    o The instrument is weak if the partial F-statistic testing the joint significance of the
    coefficients of the instruments ( 0 is less than 10.

    Consequences of weak instruments


     A weak instrument will undermine the precision of the estimator.
    /
     The IV estimator is asymptotically consistent but biased toward OLS estimator in finite-
    sample. The size of the bias is positively related to the weakness of the instrument(s) and
    inversely related with the size of the sample.

    10

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