DP127 The Econometric Analysis of Risk Terms
|Author(s):||Adrian Pagan, Aman Ullah|
|Publication Date:||September 1986|
|Keyword(s):||ARCH, Errors-in-Variables, Exchange Rates, Instrumental Variables, Interest Rates, Risk|
|JEL(s):||131, 211, 212, 313, 431|
|Programme Areas:||Applied Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=127|
This paper provides a critical survey of the methods employed to model the effects of risk in econometric models. Most of the popular methods are shown to suffer from errors-in-variables bias, and an instrumental variable method is suggested to overcome this problem. The technique exploits the orthogonality conditions existing between the squared unanticipated variables and functions of variables making up the information set defining the anticipations. An alternative procedure used in the paper is to directly estimate the conditional variance (risk) by non-parametric estimators. Applications are made to foreign exchange markets, interest rates and unemployment/inflation risk relations.