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http://hdl.handle.net/10419/65735
  
Title:A unique orthogonal variance decomposition PDF Logo
Authors:Wong, Woon K.
Issue Date:2008
Series/Report no.:Cardiff Economics Working Papers E2008/10
Abstract:Let e and Σ 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 A = Σ[...] , the square root of Σ.
Subjects:Variance decomposition
Cholesky decomposition
unique orthogonal decomposition and square root matrix
JEL:C01
Document Type:Working Paper
Appears in Collections:Cardiff Economics Working Papers

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