Assessing the performance of estimators dealing with measurement errors

Heitor Almeida, Murillo Campello, Antonio F. Galvao

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

We describe different procedures to deal with measurement error in linear models and assess their performance in finite samples using Monte Carlo simulations and data on corporate investment. We consider the standard instrumental variable approach proposed by Griliches and Hausman (Journal of Econometrics 31:93–118, 1986) as extended by Biorn (Econometric Reviews 19:391–424, 2000) [OLS-IV], the Arellano and Bond (Review of Economic Studies 58:277–297, 1991) instrumental variable estimator, and the higher-order moment estimator proposed by Erickson and Whited (Journal of Political Economy 108:1027–1057, 2000, Econometric Theory 18:776–799, 2002). Our analysis focuses on characterizing the conditions under which each of these estimators produce unbiased and efficient estimates in a standard “errors-invariables” setting. In the presence of fixed effects, under heteroscedasticity, or in the absence of a very high degree of skewness in the data, the EW estimator is inefficient and returns biased estimates for mismeasured and perfectly measured regressors. In contrast to the EW estimator, IV–type estimators (OLS–IV and AB-GMM) easily handle individual effects, heteroscedastic errors, and different degrees of data skewness. The IV approach, however, requires assumptions about the autocorrelation structure of the mismeasured regressor and the measurement error. We illustrate the application of the different estimators using empirical investment models. Our results show that the EW estimator produces inconsistent results when applied to real-world investment data, while the IV estimators tend to return results that are consistent with theoretical priors.​

Original languageEnglish (US)
Title of host publicationHandbook of Financial Econometrics and Statistics
PublisherSpringer New York
Pages1563-1617
Number of pages55
ISBN (Electronic)9781461477501
ISBN (Print)9781461477495
DOIs
StatePublished - Jan 1 2015

    Fingerprint

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)
  • Mathematics(all)

Cite this

Almeida, H., Campello, M., & Galvao, A. F. (2015). Assessing the performance of estimators dealing with measurement errors. In Handbook of Financial Econometrics and Statistics (pp. 1563-1617). Springer New York. https://doi.org/10.1007/978-1-4614-7750-1_57