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On Model Testing in Financial Economics


  • Robert A. Jarrow


This paper discusses the two different contradicting philosophies for testing models in financial economics (asset pricing, corporate finance, and market-microstructure) using linear regression. We synthesize these two contradicting approaches, document the errors that may occur in the existing estimation methodologies, and suggest a modified procedure that avoids these errors. Copyright (c) 2010, The Eastern Finance Association.

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  • Robert A. Jarrow, 2010. "On Model Testing in Financial Economics," The Financial Review, Eastern Finance Association, vol. 45(2), pages 277-285, May.
  • Handle: RePEc:bla:finrev:v:45:y:2010:i:2:p:277-285

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    References listed on IDEAS

    1. P. Hartmann & S. Straetmans & C. G. de Vries, 2004. "Asset Market Linkages in Crisis Periods," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 313-326, February.
    2. Brian M Lucey, Valerio Poti, Edel Tully, 2006. "International Portfolio Formation, Skewness & the Role of Gold," Frontiers in Finance and Economics, SKEMA Business School, vol. 3(1), pages 49-68, June.
    3. Capie, Forrest & Mills, Terence C. & Wood, Geoffrey, 2005. "Gold as a hedge against the dollar," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(4), pages 343-352, October.
    4. Gonzalo, Jesús & Olmo, José, 2005. "Contagion versus flight to quality in financial markets," UC3M Working papers. Economics we051810, Universidad Carlos III de Madrid. Departamento de Economía.
    5. Christophe Faugere & Julian Van Erlach, 2004. "The Price of Gold: A Global Required Yield Theory," Finance 0403003, EconWPA.
    6. Davidson, Sinclair & Faff, Robert & Hillier, David, 2003. "Gold factor exposures in international asset pricing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(3), pages 271-289, July.
    7. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
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