The Two Perils of Symmetry-Constrained Estimation of Demand Systems
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When the error covariance matrix Σ of a demand system is unknown and is estimated, (1) symmetry-constrained estimates based on such a Σ estimate may have large mean squared errors, and (2) the conventionally computed standard errors may seriously underestimate the variability of these estimates. Several procedures are compared; the conventional one (which uses a Σ estimate consisting of mean squares and products of LS residuals) performs worst.
KeywordsCovariance Matrix Demand System Error Covariance Matrix Economic Letter Covariance Matrix Estimator
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