Estimating and Testing Dynamic Corporate Finance Models

55 Pages Posted: 17 Mar 2012 Last revised: 19 May 2017

Santiago Bazdresch

Banco de México

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

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

University of Michigan, Stephen M. Ross School of Business, Students ( email )

Ann Arbor, MI
United States

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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