Estimating and Testing Dynamic Corporate Finance Models
University of Minnesota - Finance Department
R. Jay Kahn
University of Michigan, Stephen M. Ross School of Business, Students
Toni M. Whited
University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research
August 16, 2016
We assess the finite sample performance of simulation estimators that are used to estimate the parameters of dynamic corporate finance models. We formulate an out-of-sample specification test and propose a new set of statistical benchmarks that can be used to estimate and evaluate these models. These benchmarks are based on model policy functions. Our Monte Carlo simulations show that the estimators are largely unbiased with low root mean squared errors. When computed with an optimal weight matrix, the t-tests and specification tests associated with the estimators are close to correctly sized. The specification tests have excellent power to detect misspecification.
Number of Pages in PDF File: 46
Keywords: dynamic models of capital structure, policy function, value function, model evaluation, Monte Carlo
JEL Classification: C14, C52, C61, G31, G32
Date posted: March 17, 2012 ; Last revised: August 17, 2016
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