Why is there endogeneity in this specification?

operationsres

Hi guys,

I am trying to learn why there is endogeneity in the following OLS estimated regression model:





A big part would be because the differenced Leverage independent variable is correlated with the error term, largely because of omitted variables.

But I'm looking for reasons as to why the way the model is specified is conducive to endogeneity?

Thanks.

viraltux

Hi operationsres

I'd say another reason might be an autoregressive behavior between the leverage and the returns.