Max-share misidentification

• Main Authors: DOU, Liyu, HO, Paul, LUBIK, Thomas
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: max-share identification; forecast error variance; impulse responses; single horizon approach; structural shocks; transitory shocks; news shock application; demand-and-supply example; variance decomposition; econometric methods; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2796; https://ink.library.smu.edu.sg/context/soe_research/article/3795/viewcontent/Max_Share_Misidentification.pdf
• Institution: Singapore Management University

Max-share identification relies on a decomposition of the forecast error variance (FEV) over a target horizon, often conflating multiple shocks due to dependence on impulse responses at untargeted horizons and the shapes of responses to untargeted shocks. This paper introduces a "single horizon" alternative, focusing narrowly on the actual target horizon to alleviate these issues. The identified shock is characterized in terms of true structural shocks in the single horizon framework, demonstrating that this approach typically bounds results compared to the traditional implementation. Using a numerical demand-and-supply example and an empirical news shock application, the study reveals that the max-share method inadvertently emphasizes untargeted transitory shocks, a limitation avoided by the single horizon approach.