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2. Consider the following distributed lag model: 4 Y = a(1-X) +3X + XY_ + (u, u_), - t-1 0 X 1, Suppose in
2. Consider the following distributed lag model: 4 Y = a(1-X) +3X + XY_ + (u, \u_), - t-1 0 X 1, Suppose in the original model u~ AR(1): u = pu + e, where p is autocorrelation coefficient and e, is white noise. (a) If = p, can the above model be estimated by OLS? Why and why not? (b) Will the estimates thus obtained be unbiased? Consistent? Why and why not? (c) How reasonable is it to assume that = p?
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ANSWER a If the model cannot be estimated by ordinary least squares OLS because of the presence of endogeneity In the given model Yt depends on Yt1 wh...
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Quantitative Investment Analysis
Authors: Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle
3rd edition
111910422X, 978-1119104544, 1119104548, 978-1119104223
