Simultaneous Equation Systems with Heteroskedasticity: Identification, Estimation, and Stock Price Elasticities

33 Pages Posted: 22 Jan 2013

See all articles by George Milunovich

George Milunovich

Macquarie University - Department of Economics; Macquarie University, Macquarie Business School

Minxian Yang

UNSW Australia Business School, School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 21, 2013

Abstract

We give a set of identifying conditions for simultaneous equation systems (SES) with heteroskedasticity in the framework of the Gaussian quasi maximum likelihood (QML) approach. Our conditions rely on the presence of heteroskedasticity rather than exclusion restrictions. The QML estimators are shown to be consistent and asymptotically normal. Monte Carlo experiments show that the QML estimators perform well in finite samples in comparison to the GMM estimators even when volatility is mildly misspecified. In the framework of SES, we analyse the relationships between traded stock prices and volumes. Based on a sample of the Russell 3000 stocks, our estimation results provide new evidence against the homogeneous valuations hypothesis.

Keywords: Endogeneity, Multivariate Structural Models, Quasi Maximum Likelihood, Asymptotics, Stock Prices and Volumes

JEL Classification: C30, G14, C50, G12

Suggested Citation

Milunovich, George and Yang, Minxian, Simultaneous Equation Systems with Heteroskedasticity: Identification, Estimation, and Stock Price Elasticities (January 21, 2013). Available at SSRN: https://ssrn.com/abstract=2204875 or http://dx.doi.org/10.2139/ssrn.2204875

George Milunovich (Contact Author)

Macquarie University - Department of Economics ( email )

Sydney NSW 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Minxian Yang

UNSW Australia Business School, School of Economics ( email )

School of Economics
The University of New South Wales
Sydney, NSW NSW 2052
Australia
93853353 (Phone)

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