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# st:reg3, simultaneous equation model, instrumental variables

 From agfa1970@gmx.de To statalist@hsphsun2.harvard.edu, statalist@hsphsun2.harvard.edu Subject st:reg3, simultaneous equation model, instrumental variables Date Thu, 25 Feb 2010 13:26:55 +0100

```Dear all,

I have been given the advice to re-write my question in a clearer way, so here we go:

-The data: I have two monthly time series with 200 observations each. One for Cash Flows (F), another one for Returns(R). Besides, I have four instrumental variables like the term spread (called z1 to z4).

-The questions: 1)Theory:I don't want the instruments to appear on the right hand side of my simultaneous equation model but I am not sure whether I can apply 3SLS then.
2)Practical: If I can apply it, is my command (below) correct?

-The problem: I want to estimate the following simultanous equations model (SEM):

F_{t} =  R_{t} + F_{t-1} + F_{t-2} +...+R_{t-1} + R_{t-2} +...+u_{t}
R_{t} =  F_{t} + F_{t-1} + F_{t-2} +...+R_{t-1} + R_{t-2} +...+u_{t}

and fight the obvious endogeneity by 3SLS or the STATA command reg3.

But I dont want my instruments to appear on the right hand side of the equations.
I tried it with (the z's are my instruments):

reg3  (F R lag1_F lag1_R lag2_F lag2_R) (R F lag1_F lag1_R lag2_F lag2_R),inst(lag1_F lag1_R lag2_F lag2_R z1 z2 z3 z4)

and STATA reports estimates. Is this command alright?

-Why I want to do this estimation (read only if you want to suggest my a sturctural VAR):

I estimated a normal VAR(2) of the following form:

F_{t} =          F_{t-1} + F_{t-2} +...+R_{t-1} + R_{t-2} +...+u_{t}
R_{t} =          F_{t-1} + F_{t-2} +...+R_{t-1} + R_{t-2} +...+u_{t}

Now I would like to insert contemporaneous values on the right -
hand - side of the VAR which would become a "structural VAR". For
identification and because of endogeneity, I would need 1 restriction, ie. I could  either estimate

F_{t} =  R_{t} + F_{t-1} + F_{t-2} +...+R_{t-1} + R_{t-2} +...+u_{t}
R_{t} =          F_{t-1} + F_{t-2} +...+R_{t-1} + R_{t-2} +...+u_{t}

or

F_{t} =          F_{t-1} + F_{t-2} +...+R_{t-1} + R_{t-2} +...+u_{t}
R_{t} =  F_{t} + F_{t-1} + F_{t-2} +...+R_{t-1} + R_{t-2} +...+u_{t}

with a normal Choleski-Decomposition.

As I want to estimate a six - variable VAR later (three time series of cash flow and returns, respectively), I cannot enter that many
restrictions (long-run restrictions are neither possible because I
have no theory!).

Kind regards

Agther F. Dedder

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