Instrumental Variable Estimation of Factor Models with Possibly Many Variables

20 Pages Posted: 10 May 2017

See all articles by Kazuhiko Hayakawa

Kazuhiko Hayakawa

Hiroshima University

Qi Sun

Hiroshima University

Date Written: April 14, 2017

Abstract

In this paper, we consider the instrumental variables (IV) estimation of factor models. In the psychometrics literature, although the two-stage least squares (2SLS) estimator is routinely used in IV estimation of factor models, alternative estimators have been proposed in the econometrics literature. Therefore, in this paper, we compare the performance of these alternative IV estimators in the context of factor models. Monte Carlo simulation results reveal that the HLIM/HFUL estimator by Hausman, Newey, Woutesen, Chao and Swanson (2012) outperforms the 2SLS estimator and performs best in many cases.

Suggested Citation

Hayakawa, Kazuhiko and Sun, Qi, Instrumental Variable Estimation of Factor Models with Possibly Many Variables (April 14, 2017). Available at SSRN: https://ssrn.com/abstract=2965263 or http://dx.doi.org/10.2139/ssrn.2965263

Kazuhiko Hayakawa (Contact Author)

Hiroshima University ( email )

Japan

Qi Sun

Hiroshima University ( email )

739-0046
Japan

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