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Simultaneous Equation Systems With Heteroscedasticity: Identification, Estimation, and Stock Price Elasticities

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  • George Milunovich
  • Minxian Yang

Abstract

We give a set of identifying conditions for p-dimensional (p ≥ 2) simultaneous equation systems (SES) with heteroscedasticity in the framework of Gaussian quasi-maximum likelihood (QML). Our conditions rely on the presence of heteroscedasticity in the data rather than identifying restrictions traditionally employed in the literature. The QML estimator is shown to be consistent for the true parameter point and asymptotically normal. Monte Carlo experiments indicate that the QML estimator performs well in comparison to the generalized method of moments (GMM) estimator in finite samples, even when the conditional variance is mildly misspecified. We analyze the relationship between traded stock prices and volumes in the setting of SES. Based on a sample of the Russell 3000 stocks, our findings provide new evidence against perfectly elastic demand and supply schedules for equities.

Suggested Citation

  • George Milunovich & Minxian Yang, 2018. "Simultaneous Equation Systems With Heteroscedasticity: Identification, Estimation, and Stock Price Elasticities," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(2), pages 288-308, April.
    • Handle: RePEc:taf:jnlbes:v:36:y:2018:i:2:p:288-308
    DOI: 10.1080/07350015.2016.1149072
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    Cited by:

    1. Blankmeyer, Eric, 2022. "A bias test for heteroscedastic linear least squares regression," MPRA Paper 116605, University Library of Munich, Germany.
    2. Lütkepohl, Helmut & Milunovich, George & Yang, Minxian, 2020. "Inference in partially identified heteroskedastic simultaneous equations models," Journal of Econometrics, Elsevier, vol. 218(2), pages 317-345.
    3. Marius PETRESCU & Ionica ONCIOIU & Anca-Gabriela PETRESCU & Florentina-Raluca BÎLCAN & Mihai PETRESCU & Dumitru-Alexandru STOICA, 2021. "Estimating the Dynamics of Household Waste Management in Turkey," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 129-143, June.
    4. Florentina Raluca Bilcan & Ionut Adrian Ghibanu & Ion Ionut Bratu & George Adrian Bilcan, 2019. "Convergence and Divergence Regarding the Impact of Risks on Banking Transactions," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 5(4), pages 145-150, December.

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