Working Paper

The efficient market hypothesis and identification in structural VARs

Abstract: Structural vector autoregression (SVAR) models are commonly used to investigate the effect of structural shocks on economic variables. The identifying restrictions imposed in many of these exercises have been criticized in the literature. This paper extends this literature by showing that if the SVAR includes one or more variables that are efficient in the strong form of the efficient market hypothesis, the identifying restrictions frequently imposed in SVARs cannot be satisfied. We argue that our analysis will likely apply to VARs that include variables that are consistent with the weaker form of the efficient market hypothesis, especially when the data are measured at the monthly or quarterly frequencies, as is frequently the case.

Keywords: Macroeconomics; Econometric models;

Status: Published in Federal Reserve Bank of St. Louis Review, January/February 2004, 86(1), pp. 49-60

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2003

Number: 2003-032