New Minimum Chi-Square Methods in Empirical Finance

47 Pages Posted: 13 Mar 1998

See all articles by George Tauchen

George Tauchen

Duke University - Economics Group

Date Written: April 1996

Abstract

The paper reviews recently developed simulation-based minimum chi-square estimators for structural models. Particular attention is paid to selection of the auxiliary model that defines the GMM-type criterion used in the minimum chi-square estimation. Considerations of statistical efficiency and behavior under misspecification make a strong case for using a very flexible, nonparametric approach to select the auxiliary model. To avoid a numerically ill-behaved GMM criterion function, the dynamic stability of the auxiliary model must also be verified, though, interestingly, the dynamic stability of the structural model itself is automatically enforced and need not be imposed in estimation. The empirical application involves estimation of a single-factor diffusion model for the 30-day Eurodollar interest rate.

JEL Classification: C12, C15, C52

Suggested Citation

Tauchen, George E., New Minimum Chi-Square Methods in Empirical Finance (April 1996). Available at SSRN: https://ssrn.com/abstract=37675 or http://dx.doi.org/10.2139/ssrn.37675

George E. Tauchen (Contact Author)

Duke University - Economics Group ( email )

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