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New Minimum Chi-Square Methods in Empirical Finance

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Author Info
Tauchen, George E.

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Abstract

This 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, interestly, 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-fator diffusion model for the 30-day Eurodollar interest rate.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 95-42.

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Date of creation: 1995
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Publication status: Published in ADVANCES IN ECONOMICS AND ECONOMETRICS: THEORY AND APPLICATIONS, Vol. III, Econometric Society Monographs No. 28, David M. Kreps and Kenneth F. Wallis (eds.), Cambridge University Press, 1997, pages 279-317
Handle: RePEc:duk:dukeec:95-42

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C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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  6. Pieter J. van der Sluis, 1998. "EmmPack 1.01: C/C++ Code for Use with Ox for Estimation of Univariate Stochastic Volatility Models with the Efficient Method of Moments," Tinbergen Institute Discussion Papers 98-021/4, Tinbergen Institute. [Downloadable!]
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  12. Ming Liu & Harold H. Zhang, . "Specification Tests in the Efficient Method of Moments Framework with Application to the Stochastic Volatility Models," Computing in Economics and Finance 1997 93, Society for Computational Economics. [Downloadable!]
  13. Per Bjarte Solibakke, 2003. "Validity of discrete-time stochastic volatility models in non-synchronous equity markets," European Journal of Finance, Taylor and Francis Journals, vol. 9(5), pages 420-448, October. [Downloadable!] (restricted)
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