Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 81: A Second-order Approximation to the Bias of OLS Estimates in Bivariate VAR Models

Tomas Brännström
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Tomas Brännström: Department of Economic Statistics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden.

Abstract: Two terms of a second-order approximation to the bias of the multivariate OLS estimate are derived using the same technique as in Nicholls and Pope (1988). The resulting second-order bias approximation is then tested against first-order alternatives on two bivariate Monte Carlo sijmulated VAR models. Even though the second-order terms do not completely remedy the bias left unadjusted by the first-order approximations, it makes a significant change in the right direction where the first-order approximations fail, notably in the smallest samples and when systems approach non-stationarity.

Keywords: Vector autoregressive models; least-squares estimates; Bias approximation

JEL-codes: C32

34 pages, November 1995

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