Estimating and Testing Dynamic Corporate Finance Models

55 Pages Posted: 17 Mar 2012 Last revised: 7 Jul 2017

See all articles by Santiago Bazdresch

Santiago Bazdresch

Banco de México

R. Jay Kahn

Board of Governors of the Federal Reserve System

Toni M. Whited

University of Michigan, Department of Economics; National Bureau of Economic Research

Date Written: April 3, 2017

Abstract

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 specification tests associated with the estimators are close to correctly sized. These tests have excellent power to detect misspecification.

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

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

Suggested Citation

Bazdresch, Santiago and Kahn, R. Jay and Whited, Toni M., Estimating and Testing Dynamic Corporate Finance Models (April 3, 2017). Available at SSRN: https://ssrn.com/abstract=2023804 or http://dx.doi.org/10.2139/ssrn.2023804

Santiago Bazdresch (Contact Author)

Banco de México

Av. 5 de Mayo No. 18
Col. Centro, Deleg. Cuauhtémoc
Ciudad de México, DF, CDMX 06059
Mexico
+525552372000 (Phone)

HOME PAGE: http://www.banxico.org.mx/

R. Jay Kahn

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Toni M. Whited

University of Michigan, Department of Economics ( email )

735 S. State Street
Ann Arbor,, MI 48109

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,833
Abstract Views
7,388
Rank
16,245
PlumX Metrics