Identification Through Heteroskedasticity

“Identification Through Heteroskedasticity”

This paper develops a method of solving the identification problem that arises in simultaneous equations models. It is based on heteroskedasticity of the structural shocks. For simplicity, I consider hetereoskedasticity 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.

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