Efficiency Gains by Modifying GMM Estimation in Linear Models under Heteroskedasticity

Arbeitspapier

While coping with nonsphericality of the disturbances, standard GMM suffers from a blind spot for exploiting the most effective instruments when these are obtained directly from unconditional rather than conditional moment assumptions. For instance, standard GMM counteracts that exogenous regressors are used as their own optimal instruments. This is easily seen after transmuting GMM for linear models into IV in terms of transformed variables. It is demonstrated that modified GMM (MGMM), exploiting straight-forward modifications of the instruments, can achieve substantial efficiency gains and bias reductions, even under mild heteroskedasticity. Feasible MGMM implementations and their standard er-ror estimates are examined and compared with standard GMM and IV for a range of typical models for cross-section data, both by simulation and by empirical illustration.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 5088

Classification and Topics

• Classification: Wirtschaft ; Econometrics ; Estimation: General ; Single Equation Models: Single Variables: Instrumental Variables (IV) Estimation
• Subject: efficiency ; generalized method of moments ; instrument strength ; non-spherical disturbances ; (un)conditional moment assumptions

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kiviet, Jan Frederik ; Feng, Qu
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/105116
• Last update: 10.03.2025, 11:45 AM CET