A unique orthogonal variance decomposition

Wong, Woon K. 2008. A unique orthogonal variance decomposition. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

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Abstract

Let e and S be respectively the vector of shocks and its variance covariance matrix in a linear system of equations in reduced form. This article shows that a unique orthogonal variance decomposition can be obtained if we impose a restriction that maximizes the trace of A, a positive definite matrix such that Az = e where z is vector of uncorrelated shocks with unit variance. Such a restriction is meaningful in that it associates the largest possible weight for each element in e with its corresponding element in z. It turns out that 1/2 A = S , the square root of S.

Item Type:	Monograph (Working Paper)
Date Type:	Publication
Status:	Published
Schools:	Schools > Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory
Publisher:	Cardiff University
Date of First Compliant Deposit:	30 March 2016
Last Modified:	06 Oct 2015 10:17
URI:	https://orca.cardiff.ac.uk/id/eprint/77788

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