Identification Through Heteroskedasticity

Roberto Rigobon

The Review of Economics and Statistics, 2003, vol. 85, issue 4, 777-792

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. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2003
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