Consider the linear regression model for data independent over i with y i = x i

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Consider the linear regression model for data independent over i with yi= xiβ+ui. Suppose E[uixi]0 but there are available instruments zi with E[uizi]=0 and V[uizi]=σi2, where dim(z)>dim(x). We consider the GMM estimator β^ that minimizes

\[ Q_{N}(\boldsymbol{\beta})=\left[N^{-1} \sum_{i} \mathbf{z}_{i}\left(y_{i}-\mathbf{x}_{i}^{\prime} \beta\right)\right]^{\prime} \mathbf{W}_{N}\left[N^{-1} \sum_{i} \mathbf{z}_{i}\left(y_{i}-\mathbf{x}_{i}^{\prime} \beta\right)\right] \]

(a) Derive the limit distribution of N(β^β0) using the general GMM result (6.11).

(b) State how to obtain a consistent estimate of the asymptotic variance of β^.

(c) If errors are homoskedastic what choice of WN would you use? Explain your answer.

(d) If errors are heteroskedastic what choice of WN would you use? Explain your answer.

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Microeconometrics Methods And Applications

ISBN: 9780521848053

1st Edition

Authors: A.Colin Cameron, Pravin K. Trivedi

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