Regularized LIML for Many Instruments

49 Pages Posted: 19 Oct 2013

See all articles by Marine Carrasco

Marine Carrasco

University of Montreal - Departement de Ciences Economiques

Guy Tchuente

University of Kent

Date Written: July 18, 2013

Abstract

The use of many moment conditions improves the asymptotic efficiency of the instrumental variables estimators. However, in finite samples, the inclusion of an excessive number of moments increases the bias. To solve this problem, we propose regularized versions of the limited information maximum likelihood (LIML) based on three different regularizations: Tikhonov, Landweber Fridman, and principal components. Our estimators are consistent and reach the semiparametric efficiency bound under some standard assumptions. We show that the regularized LIML estimator based on principal components possesses finite moments when the sample size is large enough. The higher order expansion of the mean square error (MSE) shows the dominance of regularized LIML over regularized two-staged least squares estimators. We devise a data driven selection of the regularization parameter based on the approximate MSE. A Monte Carlo study shows that the regularized LIML works well and performs better in many situations than competing methods. Two empirical applications illustrate the relevance of our estimators: one regarding the return to schooling and the other regarding the elasticity of intertemporal substitution.

Keywords: High-dimensional models, LIML, many instruments, MSE, regularization methods

Suggested Citation

Carrasco, Marine and Tchuente, Guy, Regularized LIML for Many Instruments (July 18, 2013). CIRANO - Scientific Publications 2013s-20, Available at SSRN: https://ssrn.com/abstract=2342170 or http://dx.doi.org/10.2139/ssrn.2342170

Marine Carrasco (Contact Author)

University of Montreal - Departement de Ciences Economiques ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada
(514) 343-2394 (Phone)

HOME PAGE: http://www.sceco.umontreal.ca/liste_personnel/carrasco/index.htm

Guy Tchuente

University of Kent ( email )

Keynes College, University of Kent
Canterbury, Kent CT2 7NP
United Kingdom

HOME PAGE: http://https://www.kent.ac.uk/economics/staff/profiles/guy-tchuente.html

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
46
Abstract Views
473
PlumX Metrics