Estimation and Testing of a Smooth Transition Simultaneous Equation Model

34 Pages Posted: 16 Nov 2020

See all articles by Anjeza Kadilli

Anjeza Kadilli

University of Geneva, School of Economics and Management

Jaya Krishnakumar

University of Geneva

Date Written: September 27, 2020

Abstract

This paper proposes a generalization of the nonlinear simultaneous equation model of Pesaran and Pick (2007) by modelling the comovement between the two endogenous variables as a smooth function of the magnitude of the endogenous variable rather than a step function. The threshold and the speed at which a shock is transmitted are estimated with the other parameters of the model. We investigate the properties of an accurate estimation method which takes into account endogeneity, and a testing procedure for simultaneity in the presence of nuisance parameters under the null hypothesis. We study the conditions on the parameters that ensure the uniqueness of the implicit reduced form of the model. We apply this methodology to the comovement between the sovereign and banking sectors of nine developed countries.

Keywords: Implicit reduced form; Market comovement; NL2SLS estimation method; Nuisance parameters; Simulations; Simultaneity testing.

JEL Classification: C34, C51, G00

Suggested Citation

Kadilli, Anjeza and Krishnakumar, Jaya, Estimation and Testing of a Smooth Transition Simultaneous Equation Model (September 27, 2020). Available at SSRN: https://ssrn.com/abstract=3700506 or http://dx.doi.org/10.2139/ssrn.3700506

Anjeza Kadilli (Contact Author)

University of Geneva, School of Economics and Management ( email )

40 bd du Pont-d'Arve
Geneva 4, CH-1211
Switzerland
0041 22 379 82 75 (Phone)
0041 22 379 82 93 (Fax)

HOME PAGE: http://www.unige.ch/ses/dsec/staff/assistants/Kadilli-Anjeza.html

Jaya Krishnakumar

University of Geneva ( email )

40 Bd. du Pont d'Arve
Genève 4, CH - 1211
Switzerland

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