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Thread: Instrumental variables with S&P 500 Health Care Index

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    Exclamation Instrumental variables with S&P 500 Health Care Index




    Hello everyone,
    I am new to this forum and I would need some help on a time series regression model with financial variables.

    I am regressing Y=S&P500 Health Care index c X=bookmaker odds for the victory of Hillary Clinton x=S&P500 x=USD/EUR

    everything is in dlog, and I use the lag of the odds as instrumental variable for the first X.

    I was wondering about an instrument for the S&P500.. the lag does not work, so that I thought that MSCI world would be a nice idea, being the S&P500 Health Care components just 4.25% of the MSCI world index; but I fear reverse causality in this case too..could you please help me? is the MSCI world a good instrument?

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    Re: Instrumental variables with S&P 500 Health Care Index

    I work in econometrics so could give you a hand but I need a little more information.

    You are using quite a bit of jargon that makes your post a little difficult to read. What is MSCI world?

    And do you have a statistical question? Because this almost sounds like something that is suited to an expert in your field since it seems to require a bit of knowledge of the literature rather than a statistical expert.

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    Re: Instrumental variables with S&P 500 Health Care Index

    Hello,
    thanks for the answer and sorry for my short explanation.

    MSCI World is an equity index created by Morgan Stanley which comprehends the most important listed companies at a global level. The S&P 500 Health Care index accounts for 4.25% of the MSCI World and 13% of the S&P 500 general Index.

    You are right, my question is probably more regarding the literature.. I am not an expert though on financial series and on internet I did not find anything similar to the problem I had.

    But I have another question, probably more technical:
    Yesterday night I probably found a solution.

    my regression model is DLOG(S&P500 HEALTH CARE) c DLOG(HILLARY CLINTON ODDS) DLOG(USD/EUR) DLOG(S&P 500)

    I am using as instrumental variable for DLOG(HILLARY CLINTON ODDS) its first lag, and for the S&P 500 I am using its lag (-1) as well... do you think that exogeneity conditions hold using the own lags of the variables?

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    Re: Instrumental variables with S&P 500 Health Care Index


    yes, the lag variable will most certainly fulfill the criteria. That's the foundation of dynamic causal models.

    That is, if I am understanding your question correctly.

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