Abstract

http://ssrn.com/abstract=2023804
 
 

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Empirical Policy Function Benchmarks for Evaluation and Estimation of Dynamic Models


Santiago Bazdresch


University of Minnesota - Finance Department

R. Jay Kahn


University of Rochester - Simon Business School

Toni M. Whited


University of Rochester - Simon Business School; National Bureau of Economic Research

June 11, 2014


Abstract:     
We describe a set of model dependent statistical benchmarks that can be used to estimate and evaluate dynamic models of firms' investment and financing. The benchmarks characterize the empirical counterparts of the models' policy functions. These empirical policy functions (EPFs) are intuitively related to the corresponding model, their features can be estimated very easily and robustly, and they describe economically important aspects of firms' dynamic behavior. We calculate the benchmarks for a traditional trade-off model using Compustat data and use them to estimate some of its parameters. We present two Monte Carlo exercises. One shows that both moments-based and EPF-based estimation have low average bias and variance. The other shows that EPF based tests are dramatically better at detecting misspecification than analogous tests from moments based estimation.

Number of Pages in PDF File: 34

Keywords: dynamic models of capital structure, policy function, value function, model evaluation

JEL Classification: C14, C52, C61, G31, G32

working papers series


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Date posted: March 17, 2012 ; Last revised: June 12, 2014

Suggested Citation

Bazdresch, Santiago and Kahn, R. Jay and Whited, Toni M., Empirical Policy Function Benchmarks for Evaluation and Estimation of Dynamic Models (June 11, 2014). Available at SSRN: http://ssrn.com/abstract=2023804 or http://dx.doi.org/10.2139/ssrn.2023804

Contact Information

Santiago Bazdresch (Contact Author)
University of Minnesota - Finance Department ( email )
321 19th Avenue South
Room 3-122
Minneapolis, MN 55455
United States
R. Jay Kahn
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
Toni M. Whited
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
HOME PAGE: http://toni.marginalq.com

National Bureau of Economic Research ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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