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

  • Tobias Basse
  • Sebastian Reddemann
Registered author(s):

    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.

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    Article provided by Inderscience Enterprises Ltd in its journal Int. J. of Computational Economics and Econometrics.

    Volume (Year): 1 (2010)
    Issue (Month): 3/4 ()
    Pages: 278-293

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    Handle: RePEc:ids:ijcome:v:1:y:2010:i:3/4:p:278-293
    Contact details of provider: Web page: http://www.inderscience.com/browse/index.php?journalID==311

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    9. Schotman, Peter C. & Schweitzer, Mark, 2000. "Horizon sensitivity of the inflation hedge of stocks," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 301-315, November.
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