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Variable-ordering induced problems of impulse-response analysis and other difficulties: the dividend policy of Austrian firms

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  • Tobias Basse
  • Sebastian Reddemann

Abstract

Orthogonalised impulses are the standard way to isolate shocks to variables in a vector error correction model. While using the Cholesky decomposition to adjust interdependencies of the shocks, the ordering of the variables on the stage of estimation has a great impact on the resulting impulse response functions. It is shown how the variable ordering affects the empirical evaluation of the dividend policy of Austrian firms examining corporate earnings, dividends and inflation. Additional problems are discussed (e.g., bootstrapped confidence intervals and seasonal adjustment procedures, missing variables). The paper has two messages: it is a fatal flaw of any economic model to omit important variables. Moreover, it is also of major importance to use appropriate econometric modelling techniques.

Suggested Citation

  • Tobias Basse & Sebastian Reddemann, 2010. "Variable-ordering induced problems of impulse-response analysis and other difficulties: the dividend policy of Austrian firms," International Journal of Computational Economics and Econometrics, Inderscience Enterprises Ltd, vol. 1(3/4), pages 278-293.
  • Handle: RePEc:ids:ijcome:v:1:y:2010:i:3/4:p:278-293
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    1. repec:eee:intfin:v:48:y:2017:i:c:p:192-205 is not listed on IDEAS

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