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Identification Through Heteroskedasticity

Roberto Rigobon

Posted Online March 13, 2006
https://doi.org/10.1162/003465303772815727

Review of Economics and Statistics

Volume 85 | Issue 4 | November 2003
p.777-792
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Identification Through Heteroskedasticity

Roberto Rigobon
https://doi.org/10.1162/003465303772815727
Received: January 11, 2001
Accepted: September 20, 2002
Published Online: March 13, 2006
Abstract

This paper develops a method for solving the identification problem that arises in simultaneous-equation models. It is based on the heteroskedasticity of the structural shocks. For simplicity, I consider heteroskedasticity that can be described as a two-regime process and show that the system is just identified. I discuss identification under general conditions, such as more than two regimes, when common unobservable shocks exist, and situations in which the nature of the heteroskedasticity is misspecified. Finally, I use this methodology to measure the contemporaneous relationship between the returns on Argentinean, Brazilian, and Mexican sovereign bonds—a case in which standard identification methodologies do not apply.

Roberto Rigobon
Sloan School of Management, MIT, and NBER
https://doi.org/10.1162/003465303772815727
Abstract

This paper develops a method for solving the identification problem that arises in simultaneous-equation models. It is based on the heteroskedasticity of the structural shocks. For simplicity, I consider heteroskedasticity that can be described as a two-regime process and show that the system is just identified. I discuss identification under general conditions, such as more than two regimes, when common unobservable shocks exist, and situations in which the nature of the heteroskedasticity is misspecified. Finally, I use this methodology to measure the contemporaneous relationship between the returns on Argentinean, Brazilian, and Mexican sovereign bonds—a case in which standard identification methodologies do not apply.

Roberto Rigobon
Sloan School of Management, MIT, and NBER
Download Options

Identification Through Heteroskedasticity

Roberto Rigobon
https://doi.org/10.1162/003465303772815727
Received: January 11, 2001
Accepted: September 20, 2002
Published Online: March 13, 2006
Abstract

This paper develops a method for solving the identification problem that arises in simultaneous-equation models. It is based on the heteroskedasticity of the structural shocks. For simplicity, I consider heteroskedasticity that can be described as a two-regime process and show that the system is just identified. I discuss identification under general conditions, such as more than two regimes, when common unobservable shocks exist, and situations in which the nature of the heteroskedasticity is misspecified. Finally, I use this methodology to measure the contemporaneous relationship between the returns on Argentinean, Brazilian, and Mexican sovereign bonds—a case in which standard identification methodologies do not apply.

Roberto Rigobon
Sloan School of Management, MIT, and NBER
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