Properties of the Conditional Likelihood Ratio Test under Discrete Approximation

The conditional likelihood ratio (CLR) test is a valuable tool for inference under weak identification, with appealing theoretical properties in both linear and non-linear settings.

Its implementation nevertheless requires minimizing a non-convex objective function, a difficulty long recognized even in the linear IV setting.

While grid-based methods that provide a practical approximation may perform well in particular designs, such procedures do not guarantee that the resulting test preserves the theoretical properties of the CLR test uniformly across a class of data-generating processes.

This paper examines the implementation challenges and their consequences for test size and power.

In the linear IV settings, we contrast the grid-based method with the polynomial approach of Moreira, Newey, and Sharifvaghefi(2024), which guarantees global minimization and aligns computation with the theoretical properties of the CLR test.