Efficient Estimation with Many Weak Instruments Using Regularization Techniques

Tchuente, Guy and Carrasco, Marine (2016) Efficient Estimation with Many Weak Instruments Using Regularization Techniques. Econometric Reviews, 35 (8-10). pp. 1609-1637. ISSN 0747-4938. E-ISSN 1532-4168. (doi:https://doi.org/10.1080/07474938.2015.1092806) (Full text available)

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The problem of weak instruments is due to a very small concentration parameter. To boost the concentration parameter, we propose to increase the number of instruments to a large number or even up to a continuum. However, in finite samples, the inclusion of an excessive number of moments may be harmful. To address this issue, we use regularization techniques as in Carrasco (2012) and Carrasco and Tchuente (2014). We show that normalized regularized two-stage least squares (2SLS) and limited maximum likelihood (LIML) are consistent and asymptotically normally distributed. Moreover, our estimators are asymptotically more efficient than most competing estimators. Our simulations show that the leading regularized estimators (LF and T of LIML) work very well (are nearly median unbiased) even in the case of relatively weak instruments. An application to the effect of institutions on output growth completes the article.

Item Type: Article
Uncontrolled keywords: 2SLS; LIML; Many weak instruments; Regularization methods; Semiparametric efficiency bound; C13
Subjects: H Social Sciences > HA Statistics
Divisions: Faculties > Social Sciences > School of Economics
Depositing User: Guy Tchuente
Date Deposited: 20 Jan 2016 13:14 UTC
Last Modified: 16 May 2019 23:00 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/53783 (The current URI for this page, for reference purposes)
Tchuente, Guy: https://orcid.org/0000-0001-8507-3337
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