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Alternative estimating and testing empirical strategies for fractional regression models

Author

Listed:
  • Esmeralda A. Ramalho

    () (Universidade de Evora, Departamento de Economia, CEFAGE-UE)

  • Joaquim J.S. Ramalho

    () (Universidade de Evora, Departamento de Economia, CEFAGE-UE)

  • José M.R. Murteira

    () (Faculdade de Economia, Universidade de Coimbra, CEMAPRE)

Abstract

In many economic settings, the variable of interest is often a fraction or a proportion, being defined only on the unit interval. The bounded nature of such variables and, in some cases, the possibility of nontrivial probability mass accumulating at one or both boundaries raise some interesting estimation and inference issues. In this paper we: (i) provide a comprehensive survey of the main alternative models and estimation methods suitable to deal with fractional response variables; (ii) propose a full testing methodology to assess the validity of the assumptions required by each alternative estimator; and (iii) examine the finite sample properties of most of the estimators and tests discussed through an extensive Monte Carlo study. An application concerning corporate capital structure choices is also provided.

Suggested Citation

  • Esmeralda A. Ramalho & Joaquim J.S. Ramalho & José M.R. Murteira, 2009. "Alternative estimating and testing empirical strategies for fractional regression models," CEFAGE-UE Working Papers 2009_08, University of Evora, CEFAGE-UE (Portugal).
  • Handle: RePEc:cfe:wpcefa:2009_08
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    References listed on IDEAS

    as
    1. Joaquim J.S. Ramalho & Jacinto Vidigal da Silva, 2009. "A two-part fractional regression model for the financial leverage decisions of micro, small, medium and large firms," Quantitative Finance, Taylor & Francis Journals, vol. 9(5), pages 621-636.
    2. Paolino, Philip, 2001. "Maximum Likelihood Estimation of Models with Beta-Distributed Dependent Variables," Political Analysis, Cambridge University Press, vol. 9(04), pages 325-346, January.
    3. Chesher, Andrew, 1983. "The information matrix test : Simplified calculation via a score test interpretation," Economics Letters, Elsevier, vol. 13(1), pages 45-48.
    4. Machado, Jose A F & Santos Silva, Joao M C, 2008. "Quantiles for Fractions and Other Mixed Data," Economics Discussion Papers 3550, University of Essex, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Fractional regression models; Conditional mean tests; Non-nested hypotheses; Zero outcomes; Two-part models.;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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