tailieunhanh - Lecture Introductory Econometrics for Finance: Chapter 7 - Chris Brooks

In this chapter, you will learn how to: Compare and contrast single equation and systems-based approaches to building models; discuss the cause, consequence and solution to simultaneous equations bias; derive the reduced form equations from a structural model; describe several methods for estimating simultaneous equations models; explain the relative advantages and disadvantages of VAR modelling;. | ‘Introductory Econometrics for Finance’ © Chris Brooks 2013 Chapter 7 Multivariate models ‘Introductory Econometrics for Finance’ © Chris Brooks 2013 Simultaneous Equations Models All the models we have looked at thus far have been single equations models of the form y = X + u All of the variables contained in the X matrix are assumed to be EXOGENOUS. y is an ENDOGENOUS variable. An example from economics to illustrate - the demand and supply of a good: (1) (2) (3) where = quantity of the good demanded = quantity of the good supplied St = price of a substitute good Tt = some variable embodying the state of technology ‘Introductory Econometrics for Finance’ © Chris Brooks 2013 Assuming that the market always clears, and dropping the time subscripts for simplicity (4) (5) This is a simultaneous STRUCTURAL FORM of the model. The point is that price and quantity are determined simultaneously (price affects quantity and quantity affects price). P and Q are . | ‘Introductory Econometrics for Finance’ © Chris Brooks 2013 Chapter 7 Multivariate models ‘Introductory Econometrics for Finance’ © Chris Brooks 2013 Simultaneous Equations Models All the models we have looked at thus far have been single equations models of the form y = X + u All of the variables contained in the X matrix are assumed to be EXOGENOUS. y is an ENDOGENOUS variable. An example from economics to illustrate - the demand and supply of a good: (1) (2) (3) where = quantity of the good demanded = quantity of the good supplied St = price of a substitute good Tt = some variable embodying the state of technology ‘Introductory Econometrics for Finance’ © Chris Brooks 2013 Assuming that the market always clears, and dropping the time subscripts for simplicity (4) (5) This is a simultaneous STRUCTURAL FORM of the model. The point is that price and quantity are determined simultaneously (price affects quantity and quantity affects price). P and Q are endogenous variables, while S and T are exogenous. We can obtain REDUCED FORM equations corresponding to (4) and (5) by solving equations (4) and (5) for P and for Q (separately). Simultaneous Equations Models: The Structural Form ‘Introductory Econometrics for Finance’ © Chris Brooks 2013 Solving for Q, (6) Solving for P, (7) Rearranging (6), (8) Obtaining the Reduced Form ‘Introductory Econometrics for Finance’ © Chris Brooks 2013 Multiplying (7) through by , (9) (8) and (9) are the reduced form equations for P and Q. Obtaining the Reduced Form (cont’d) ‘Introductory Econometrics for Finance’ © Chris Brooks 2013 But what would happen if we had estimated equations (4) and (5), . the structural form equations, separately using OLS? Both equations depend on P. One of the CLRM assumptions was that E(X u) = 0, where X is a matrix containing all the variables on the RHS of the equation. It is clear from (8) that P is related to the errors in (4) .