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Finite sample inference in multivariate instrumental regressions with an application to Catastrophe bonds

Author

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  • Marie-Claude Beaulieu
  • Lynda Khalaf
  • Maral Kichian
  • Olena Melin

Abstract

We propose exact exogeneity tests and weak-instruments-robust tests on factor loadings for a system of regressions with possibly non-Gaussian disturbances. Our methodology is valid in finite samples and accounts for common cross-sectional factors. Analytical invariance results are derived, with companion simulation studies. Finally, a total-effect parameter is introduced that embeds the unobservable endogeneity factor. Proposed tests are applied to assess whether Catastrophe bond mutual funds co-move with financial markets. Significant risk premiums are detected globally and over time, although they are less pervasive from a domestic currency perspective. Findings underscore the importance of instrumenting and assessing direct and total effects.

Suggested Citation

  • Marie-Claude Beaulieu & Lynda Khalaf & Maral Kichian & Olena Melin, 2022. "Finite sample inference in multivariate instrumental regressions with an application to Catastrophe bonds," Econometric Reviews, Taylor & Francis Journals, vol. 41(10), pages 1205-1242, November.
    • Handle: RePEc:taf:emetrv:v:41:y:2022:i:10:p:1205-1242
    DOI: 10.1080/07474938.2022.2114625
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