THE ROLE OF CONDITIONAL HETEROSKEDASTICITY IN IDENTIFYING AND ESTIMATING LINEAR TRIANGULAR SYSTEMS, WITH APPLICATIONS TO ASSET PRICING MODELS THAT INCLUDE A MISMEASURED FACTOR
SUMMARY A new estimator is proposed for linear triangular systems, where identification results from the model errors following a bivariate and diagonal GARCH(1,1) process with potentially time‐varying error covariances. This estimator applies when traditional instruments are unavailable. I demonstrate its usefulness on asset pricing models like the capital asset pricing model and Fama–French three‐factor model. In the context of a standard two‐pass cross‐sectional…