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Structural VAR identification in asset markets using short-run market inefficiencies

  • Gultekin Isiklar

    (State University of New York at Albany)

We impose a structure on the short-run market inefficiencies in the asset markets and use this structure to identify a structural vector autoregressive model. This novel identification method is based on more reasonable assumptions than the standard approaches and also gives estimates for inefficiency measures in the markets, which are important on their own. Applying our method on the major European stock markets, we find that while the UK shocks were dominant in Europe until 1999, German innovations have been more important since 1999. We also find that the pattern of inefficiencies are consistent with the rational inattention model of Sims (2003).

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File URL: http://128.118.178.162/eps/em/papers/0501/0501001.pdf
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Paper provided by EconWPA in its series Econometrics with number 0501001.

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Length: 25 pages
Date of creation: 01 Jan 2005
Date of revision: 02 Jan 2005
Handle: RePEc:wpa:wuwpem:0501001
Note: Type of Document - pdf; pages: 25
Contact details of provider: Web page: http://128.118.178.162

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  1. Chen, Gong-meng & Firth, Michael & Meng Rui, Oliver, 2002. "Stock market linkages: Evidence from Latin America," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1113-1141, June.
  2. Jon Faust & Eric Swanson & and Jonathan H. Wright, 2002. "Identifying vars based on high frequency futures data," International Finance Discussion Papers 720, Board of Governors of the Federal Reserve System (U.S.).
  3. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  4. Knif, Johan & Pynnonen, Seppo, 1999. "Local and global price memory of international stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 129-147, April.
  5. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  6. Nicholas Barberis & Andrei Shleifer & Robert W. Vishny, 1997. "A Model of Investor Sentiment," NBER Working Papers 5926, National Bureau of Economic Research, Inc.
  7. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  8. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation for Research in Economics, Yale University.
  9. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  10. Eun, Cheol S. & Shim, Sangdal, 1989. "International Transmission of Stock Market Movements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 241-256, June.
  11. John H. Cochrane, 1999. "New Facts in Finance," NBER Working Papers 7169, National Bureau of Economic Research, Inc.
  12. Lucio Sarno & Daniel L. Thornton, 2003. "The efficient market hypothesis and identification in structural VARs," Working Papers 2003-032, Federal Reserve Bank of St. Louis.
  13. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
  14. Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2007. "Do industries lead stock markets?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 367-396, February.
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