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 School of Business; National Bureau of Economic Research

November 2013


Abstract:     
This paper presents a set of benchmark moments for evaluation or estimation of quantitative capital structure models. The moments are directly related to the models being studied: the main features of each models' empirical policy functions. The paper describe a general method for estimating these benchmarks and shows that they ‘capture’ a substantial part of the actual variation in firms actions in the data. Two versions of these benchmarks are presented: one dimensional ones and two dimensional ones. In both cases we express these as the total change in the control variable and the change relative to the change in the state variable. The empirical policy functions turn out to be smooth and mostly monotonous. Three key numbers that we suggest quantitative dynamic models have match closely are that within firms, for every 10% increase in debt relative to assets investment relative to assets declines 3.7%, debt issuance relative to market value decreases 1.1% and equity issuance relative to market value increases 0.5%.

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: November 19, 2013

Suggested Citation

Bazdresch, Santiago and Kahn, R. Jay and Whited, Toni M., Empirical Policy Function Benchmarks for Evaluation and Estimation of Dynamic Models (November 2013). 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 School of Business ( 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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