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The econometric analysis of models with risk terms
Author(s) -
Pagan Adrian,
Ullah Aman
Publication year - 1988
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950030202
Subject(s) - estimator , orthogonality , econometrics , estimation , term (time) , set (abstract data type) , econometric model , variable (mathematics) , order (exchange) , economics , computer science , statistics , mathematics , finance , mathematical analysis , physics , geometry , management , quantum mechanics , programming language
In this paper we have attempted to provide an integrated approach to the estimation of models with risk terms. It was argued that there exist orthogonality conditions between variables in the information set and higher‐order moments of the unanticipated variable density. These could be exploited to provide consistent estimators of the parameters associated with the risk term. Specifically, it was recommended that an IV estimator should be applied, with instruments constructed from the information set. Four existing methods commonly used to estimate models with risk terms are examined, and applications of the techniques are made to the estimation of the risk term in the $US/$C exchange market, and the effects of price uncertainty upon production.