Lehnert, Andreas (contributor); Passmore, Wayne (contributor) - 2005
affect mortgage pricing, such as proxies
for prepayment and credit risk.
8
The innovations (or shocks) "
R
t
and "
P
t
can be … vector of structural
innovations ("
R
t
;"
P
t
)
0
. Then we can rewrite the system as:
0
X
t
=
1
X
t−1
+
Z
Z
t
+ "
t
:(3 …)
The innovations are assumed to have a variance-covariance matrix of . Because
the shocks are defined as pure innovations …