The present paper suggests a new way to carry out IV estimation with many instruments. Our suggestion is to cross-sectionally average the instruments and use these averages as instruments. We provide a theoretical and Monte Carlo analysis of this approach.

The aim of this paper is to consider multivariate stochastic volatility models for large dimensional datasets. We suggest the use of the principal component methodology of Stock and Watson [Stock, J.H., Watson, M.W., 2002. Macroeconomic forecasting using diffusion indices. Journal of Business...