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The Role Of Conditional Heteroskedasticity In Identifying And Estimating Linear Triangular Systems, With Applications To Asset Pricing Models That Include A Mismeasured Factor

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  • Todd Prono

Abstract

SUMMARY A new estimator is proposed for linear triangular systems, where identification results from the model errors following a bivariate and diagonal GARCH(1,1) process with potentially time‐varying error covariances. This estimator applies when traditional instruments are unavailable. I demonstrate its usefulness on asset pricing models like the capital asset pricing model and Fama–French three‐factor model. In the context of a standard two‐pass cross‐sectional regression approach, this estimator improves the pricing performance of both models. Set identification bounds and an associated estimator are also provided for cases where the conditions supporting point identification fail. Copyright © 2013 John Wiley & Sons, Ltd.

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  • Todd Prono, 2014. "The Role Of Conditional Heteroskedasticity In Identifying And Estimating Linear Triangular Systems, With Applications To Asset Pricing Models That Include A Mismeasured Factor," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(5), pages 800-824, August.
    • Handle: RePEc:wly:japmet:v:29:y:2014:i:5:p:800-824
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    Cited by:

    1. Lewbel, Arthur, 2018. "Identification and estimation using heteroscedasticity without instruments: The binary endogenous regressor case," Economics Letters, Elsevier, vol. 165(C), pages 10-12.
    2. Emanuele BACCHIOCCHI, 2015. "On the Identification of Interdependence and Contagion of Financial Crises," Departmental Working Papers 2015-12, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    3. Amanda Linell & Edwin Muchapondwa & Herbert Ntuli & Martin Sjöstedt & Sverker C. Jagers, 2018. "Factors influencing people’s perceptions towards conservation of transboundary wildlife resources. The case of the Great-Limpopo Trans-frontier Conservation Area," Working Papers 765, Economic Research Southern Africa.
    4. Christopher F Baum & Arthur Lewbel, 2019. "Advice on using heteroskedasticity-based identification," Stata Journal, StataCorp LP, vol. 19(4), pages 757-767, December.

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