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Jeffreys prior analysis of the simultaneous equations model in the case with n+1 endogenous variables

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  • Chao, John C.
  • Phillips, Peter C. B.

Abstract

This paper analyzes the behavior of posterior distributions under the Jeffreys prior in a simultaneous equations model. The case under study is that of a general limited information setup with n + 1 endogenous variables. The Jeffreys prior is shown to give rise to a marginal posterior density which has Cauchy-like tails similar to that exhibited by the exact finite sample distribution of the corresponding LIML estimator. A stronger correspondence is established in the special case of a just-identified orthonormal canonical model, where the posterior density under the Jeffreys prior is shown to have the same functional form as the density of the finite sample distribution of the LIML estimator. The work here generalizes that of Chao and Phillips (1997), which gives analogous results for the special case of two endogenous variables.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 111 (2002)
Issue (Month): 2 (December)
Pages: 251-283

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Handle: RePEc:eee:econom:v:111:y:2002:i:2:p:251-283
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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Find related papers by JEL classification:
  • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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  1. Dreze, Jacques H, 1976. "Bayesian Limited Information Analysis of the Simultaneous Equations Model," Econometrica, Econometric Society, vol. 44(5), pages 1045-75, September.
  2. Phillips, P C B, 1980. "The Exact Distribution of Instrumental Variable Estimators in an Equation Containing n + 1 Endogenous Variables," Econometrica, Econometric Society, vol. 48(4), pages 861-78, May.
  3. Kleibergen, Frank & van Dijk, Herman K., 1994. "On the Shape of the Likelihood/Posterior in Cointegration Models," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 514-551, August.
  4. Maddala, G S, 1976. "Weak Priors and Sharp Posteriors in Simultaneous Equation Models," Econometrica, Econometric Society, vol. 44(2), pages 345-51, March.
  5. Phillips, Peter C B, 1985. "The Exact Distribution of LIML: II," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 21-36, February.
  6. In Choi & Peter C.B. Phillips, 1989. "Asymptotic and Finite Sample Distribution Theory for IV Estimators and Tests in Partially Identified Structural Equations," Cowles Foundation Discussion Papers 929, Cowles Foundation for Research in Economics, Yale University.
  7. Peter C.B. Phillips, 1990. "To Criticize the Critics: An Objective Bayesian Analysis of Stochastic Trends," Cowles Foundation Discussion Papers 950, Cowles Foundation for Research in Economics, Yale University.
  8. Peter C.B. Phillips, 1992. "Some Exact Distribution Theory for Maximum Likelihood Estimators of Cointegrating Coefficients in Error Correction Models," Cowles Foundation Discussion Papers 1039, Cowles Foundation for Research in Economics, Yale University.
  9. Dreze, Jacques H. & Richard, Jean-Francois, 1983. "Bayesian analysis of simultaneous equation systems," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 9, pages 517-598 Elsevier.
  10. Zellner, Arnold, 1970. "Estimation of Regression Relationships Containing Unobservable Independent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 441-54, October.
  11. Constantine, A. G. & Muirhead, R. J., 1976. "Asymptotic expansions for distributions of latent roots in multivariate analysis," Journal of Multivariate Analysis, Elsevier, vol. 6(3), pages 369-391, September.
  12. Kleibergen, Frank & van Dijk, Herman K., 1998. "Bayesian Simultaneous Equations Analysis Using Reduced Rank Structures," Econometric Theory, Cambridge University Press, vol. 14(06), pages 701-743, December.
  13. Peter C.B. Phillips, 1981. "Marginal Densities of Instrumental Variable Estimators in the General Single Equation Case," Cowles Foundation Discussion Papers 609, Cowles Foundation for Research in Economics, Yale University.
  14. Mariano, Roberto S, 1982. "Analytical Small-Sample Distribution Theory in Econometrics: The Simultaneous-Equations Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 503-33, October.
  15. Chao, J. C. & Phillips, P. C. B., 1998. "Posterior distributions in limited information analysis of the simultaneous equations model using the Jeffreys prior," Journal of Econometrics, Elsevier, vol. 87(1), pages 49-86, August.
  16. Peter C.B. Phillips, 1987. "Partially Identified Econometric Models," Cowles Foundation Discussion Papers 845R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1988.
  17. Poirier, Dale, 1994. "Jeffreys' prior for logit models," Journal of Econometrics, Elsevier, vol. 63(2), pages 327-339, August.
  18. Peter C.B. Phillips, 1982. "Exact Small Sample Theory in the Simultaneous Equations Model," Cowles Foundation Discussion Papers 621, Cowles Foundation for Research in Economics, Yale University.
  19. Hillier, Grant H, 1990. "On the Normalization of Structural Equations: Properties of Direct Estimators," Econometrica, Econometric Society, vol. 58(5), pages 1181-94, September.
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Cited by:

  1. Frank Kleibergen & Eric Zivot, 1998. "Bayesian and Classical Approaches to Instrumental Variables Regression," Econometrics 9812002, EconWPA.
  2. Koop, Gary M & Poirier, Dale J & Tobias, Justin, 2005. "Semiparametric Bayesian Inference in Multiple Equation Models," Staff General Research Papers 12009, Iowa State University, Department of Economics.
  3. Radchenko, Stanislav, 2005. "Lags in the response of gasoline prices to changes in crude oil prices: The role of short-term and long-term shocks," Energy Economics, Elsevier, vol. 27(4), pages 573-602, July.
  4. Radchenko, Stanislav & Tsurumi, Hiroki, 2006. "Limited information Bayesian analysis of a simultaneous equation with an autocorrelated error term and its application to the U.S. gasoline market," Journal of Econometrics, Elsevier, vol. 133(1), pages 31-49, July.
  5. Stanislav Radchenko, 2004. "Lags in the response of gasoline prices to changes in crude oil," Econometrics 0406001, EconWPA.

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