Structural Constant Conditional Correlation

A small strand of recent literature is occupied with identifying simultaneity in multipleequation systems through autoregressive conditional heteroscedasticity. Since thisapproach assumes that the structural innovations are uncorrelated, any contemporaneousconnection of the endogenous variables needs to be exclusively explained by mutualspillover effects. In contrast, this paper allows for instantaneous covariances, which becomeidentifiable by imposing the constraint of structural constant conditional correlation(SCCC). In this, common driving forces can be modelled in addition to simultaneous transmissioneffects. The new methodology is applied to the Dow Jones and Nasdaq Compositeindexes in a small empirical example, illuminating scope and functioning of the SCCCmodel.