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On the Use of Two-Stage Least Squares in Financial Models: A Comment

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  • Smith, V. Kerry

Abstract

There appears to be growing interest in the development and estimation of simultaneous equation models for finance. Simkowitz and Jones [11] stimulated much of this concern in their observations on the need for these structures. Moreover, Simkowitz's application to the modeling of security returns with Logue [12] provides some support for these suggestions. Recently Lloyd [6] has argued that there may be significant problems in using two-stage least squares (hereafter 2SLS) with such models as a result of the potential for contemporaneous correlation in the structural errors across equations. The purpose of this note is to question several of Lloyd's conclusions and to provide some evidence that his findings may not be representative for the broad array of simultaneous models applicable to financial problems.

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  • Smith, V. Kerry, 1976. "On the Use of Two-Stage Least Squares in Financial Models: A Comment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(3), pages 505-509, September.
    • Handle: RePEc:cup:jfinqa:v:11:y:1976:i:03:p:505-509_02
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    Cited by:

    1. Claude Montmarquette & Nathalie Viennot-Briot, 2019. "The Gamma Factors and the Value of Financial Advice," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 387-411, May.

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