cemmap working paper, Centre for Microdata Methods and Practice CWP26/06
For the problem of testing the hypothesis that all m coefficients of the RHS endogenous variables in an IV regression are zero, the likelihood ratio (LR) test can, if the reduced form covariance matrix is known, be rendered similar by a conditioning argument. To exploit this fact requires knowledge of the relevant conditional cdf of the LR statistic, but the statistic is a function of the smallest characteristic root of an (m + 1)−square matrix, and is therefore analytically difficult to deal with when m > 1. We show in this paper that an iterative conditioning argument used by Hillier (2006) and Andrews, Moreira, and Stock (2007) to evaluate the cdf in the case m = 1 can be generalized to the case of arbitrary m. This means that we can completely bypass the difficulty of dealing with the smallest characteristic root. Analytic results are obtained for the case m = 2, and a simple and efficient simulation approach to evaluating the cdf is suggested for larger values of m.