This book presents recent research on robustness in econometrics. 8 0 obj This is why much of what is seen as theoretical contribution in economics is constituted by deriving familiar results from different modelling assumptions. Biden spoke in Delaware to announce… The economic intuition of this result stems from the fact that we are studying a market equilibrium ag- ... we derive robust comparative static results with respect to changes in the discount factor, borrowing limits, the parameters of the utility function ðe.g., the level of risk aversionÞ, and the parameters of … The results are reported in Table 6.5. All economic models involve abstractions and idealisations. Further empirical work might shed more light on this issue if and where new data can be obtained. Robustness analysis in economics is thus usually a special, degenerate form of general robustness analysis as Wimsatt defines it: checking the robustness of a result with respect to a limited set of modelling assumptions that are usually plainly unrealistic. Abraham Lioui, in Handbook of Environmental and Sustainable Finance, 2016. Lien (1996) argues that the estimation of the hedge ratio and hedging effectiveness may change significantly when the possibility of cointegration between prices is ignored. The robustness of Bayesian updating is tied to the notion of an approximating model (A, B, C) and perturbations around that model. For VIX and Market, it seems that their significance depends on the window length, although the direction of the impact is the expected one (positive). /Type /FontDescriptor Is it the case that the cost of capital has changed significantly, or is it a problem with the models and how they are implemented in the current environment? 3. As such, all individual models can be, and often are, subject to some instability over time. Download Limit Exceeded You have exceeded your daily download allowance. Whatever empirical approach to inference is adopted, structural or nonstructural, researchers should strive to provide as much validation evidence as the data and methods permit. Variables within the panel-VAR are estimated alphas by country and by year (from Table 5); HHI = logarithm of Herfindahl Index; DCPC = logarithm of the domestic credit to the private sector as a percent of GDP; sovereign = sovereign lending rate. /AvgWidth 401 /Subtype /TrueType Note: Figure presents impulse response functions (IRFs), which show the responses of a variable of interest to a shock of one plus/minus standard deviation of the same variable or another variable within the panel-VAR. /StemV 78 ‎This book focuses on general frameworks for modeling heavy-tailed distributions in economics, finance, econometrics, statistics, risk management and insurance. In economics, models, rather than theories, seem to be the fundamental units of appraisal and practitioners seem to hold in high esteem the criterion of ‘robustness’. While quantile regression estimates are inherently robust to contamination of the response observations, they can be quite sensitive to contamination of the design observations, {xi}. Fig. Nor will non-rejected models necessarily outperform rejected models in terms of their (context-specific) predictive accuracy. /FontName /Arial-BoldMT We presented many robustness checks in Section 12.4 with a wide variety of explanatory variables and dependent variables. The forecast was compared to its actual impact. Shows the economic consequences of observed heavy-tailed risk distributions in the fields of economics, finance and insurance. A model is deemed invalid if it is rejected according to some statistical criterion. As advocated by Bird et al. The second approach is based on a pragmatic epistemological view, in which it is acknowledged that all models are necessarily simplifications of agents’ actual decision-making behavior. /XHeight 519 Copyright © 2020 Elsevier B.V. or its licensors or contributors. Wise (1985) exploited a housing subsidy experiment to evaluate a model of housing demand. /CreationDate (D:20070925175427+03'00') In Panel A of Table 6.4 we present the results of the regression analysis when only the dependent variable is included in the regression. Heavy-Tailed Distributions and Robustness in Economics and Finance. The results, therefore, are robust. Economic theory itself does not tell which idealizations are truly fatal or harmful for the result and which are not. This is why much of what is seen as theoretical contribution in economics is constituted by deriving familiar results from different modelling assumptions. PIERRE LEQUEUX, in Advanced Trading Rules (Second Edition), 2002. McFadden’s model validation treats pre-BART observations as the estimation sample and post-BART observations as the validation sample. Each of these is discussed and illustrated by means of examples from economic practice. The second robustness test is to use the hedging approach while calculating the hedge ratio by using various models. Further empirical research along these lines could also consider investor valuations practices and due diligence reviews, as well as the interplay between contractual governance, innovation, and performance (in the spirit of Kortum and Lerner, 2000; Baker and Gompers, 2003). In economics, robustness is attributed to financial markets that continue to perform despite alterations in market conditions. It is most likely that preplanned exits influence portfolio size per manager, which could be the subject of a new and different paper; but our data comprise 35 venture capital funds, and it is therefore not possible to fully consider this issue. /FontDescriptor 9 0 R Further empirical work in this regard might also consider sources of funds in the spirit of Mayer et al. Robustness Checks: Accounting for CSR Event Type. The final specification results from a process in which the model structure is revised as estimation proceeds, by adding parameters and changing functional forms, as deficiencies in model fit are discovered. >> 2, we observe that the effect of a one standard deviation shock of the supervision index on alpha is positive. ADF1 assumes an autoregressive model for the residual, ADF2 assumes an autoregressive model with drift, and ADF3 assumes an autoregressive model with drift and trend stationary. As advocated by previous literature, this length may be of importance. D. Wade Hands Derivational Robustness, Credible Substitute Systems, and Mathematical Economic Models: The Case of Stability Analysis in Walrasian General Equilibrium Theory, SSRN Electronic Journal (Jan 2014). 0 0 0 722 722 722 0 667 0 0 0 278 0 0 0 833 << It is general practice to report performance in absolute terms as well as in a risk adjusted form (De Rosa, 1996; Murphy, 1990). This review summarizes a nascent body of theoretical research on design of incentives when the environment is not fully known to the designer and offers some general lessons from the work so far. In Lien and Luo (1994) it is shown that, although GARCH may characterize price behavior, the cointegrating relation is the only truly indispensable component when comparing ex post performance of various hedging strategies. Estimation results with nine model specifications for the Hedge ratio. Moreover, 2.7% of alpha’s forecast error variance after 20 years is explained by sovereign risk. 1. Variables within the panel-VAR are estimated alphas by country and by year (from Tables 5 and 6). robust statistics, which worries about the properties of . /FontDescriptor 5 0 R Put differently, how can DCDP models be validated and choices be made among competing models? /FontBBox [-568 -307 2000 1007] /Leading 150 In economics, models, rather than theories, seem to be the fundamental units of appraisal and practitioners seem to hold in high esteem the criterion of ‘robustness’. HHI = logarithm of Herfindahl Index; DCPC = logarithm of the domestic credit to the private sector as a percent of GDP; sovereign = sovereign lending rate. The first is the view that knowledge is absolute, that is, there exists a “true” decision-theoretic model from which observed data are generated. /ItalicAngle 0 Impulse response functions (IRFs)—alpha, Herfindahl Index, domestic credit to the private sector and sovereign risk. Within-sample model fit: DCDP papers commonly assess model fit to the estimation sample, often, but not always, using formal statistical tests. /LastChar 122 /FontName /TimesNewRomanPSMT Michael P. Keane, ... Kenneth I. Wolpin, in Handbook of Labor Economics, 2011. Looking at evidence from a number of models remains the best practice. This book focuses on general frameworks for modeling heavy-tailed distributions in economics, finance, econometrics, statistics, risk management and insurance. Our “robust” decision-maker wants to know how well a given rule will work when he does not know a single transition law $ \ldots $. I�?��� This book focuses on general frameworks for modeling heavy-tailed distributions in economics, finance, econometrics, statistics, risk management and insurance. Robustness to distributional assumptions is an important consideration throughout statistics, so it is important to emphasize that quantile regression inherits robustness properties of the ordinary sample quantiles. >> SINCE 1828. /FontBBox [-498 -307 1120 1023] Finally, note that our empirical analysis in this chapter is specific to the venture capital context in which investment is invariably made with a view toward exit in the form of an IPO or acquisition. If the coefficients are plausible and robust, this is commonly interpreted as evidence of structural validity. Nonlinearity in this case is captured by a polynomial in the error correction term. This column, taken from a recent Vox eBook, examines recent experiences and the risk-management literature. endobj With all this said, it is our experience that rate regulation tends to adapt to changes in the cost of capital with a lag. The validity of the model was then assessed according to how well it could forecast (predict) the behavior of households in the treatment villages.162. Stability means that cost of capital estimates done in similar economic environments should be similar, not only period-to-period but also company-to-company within a comparable sample. Table 12. Note: Table presents the variance decompositions (VDC), which show the components of the forecasts error variance of all variables within the panel-VAR. If estimates seem high or low by historical standards, the analyst should try to understand why. Our dataset provided some new control variables for entrepreneurial firm quality and venture capital fund quality; future work might consider more refined control variables with more detailed data. (2001) suggested that the hedge ratio should be estimated from a nonlinear model, which can be written in first differences as: Nonlinear error correction models have also been suggested (not necessarily for estimating the hedge ratio) by Escribano (1987), and the procedure is applied to a model of the demand for money in Hendry and Ericcson (1991). /FontBBox [-628 -376 2000 1010] We report the results of a regression where the dependent variable is the conditional volatility of the CAR. (2002b). It has been argued that one problem with the conventional model of the hedge ratio, as represented by equation (6), is that it ignores short-run dynamics and the long-run relation between stock prices. << ADF, Augmented Dickey Fuller; Adj., adjusted. /Leading 150 Robustness. /Encoding /WinAnsiEncoding Table 5. Lumsdaine et al. It deserves a page of its own. /LastChar 121 %���� One consideration is whether the instability is generally expected to abate during the regulatory period. The validation sample was purposely drawn from a state in which welfare benefits were significantly lower than in the estimation sample. It normally refers to the sensitivity of an estimator with respect to the violation of certain assumptions of the model, especially in finite samples. Abstract. The formula of the Sharpe ratio is: with R¯ the annualized return of the trading rule, Rf, the annualized risk free returns of the asset under management, and σR annualized standard deviation of (daily) rule returns. (2007) and Drusch and Lioui (2010), CSR event type is likely to matter for the impact of CSR on firm value. >> Using only the control villages, they estimated a behavioral model of parental decisions about child schooling and work, as well as family fertility. McFadden and Talvitie (1977), for example, estimated a random utility model (RUM) of travel demand before the introduction of the San Francisco Bay Area Rapid Transit (BART) system, obtained a forecast of the level of patronage that would ensue, and then compared the forecast to actual usage after BART’s introduction. endobj /StemV 77 Wanting robustness in insurance: A model of catastrophe risk pricing and its empirical test @article{Zhu2017WantingRI, title={Wanting robustness in insurance: A model of catastrophe risk pricing and its empirical test}, author={W. Zhu}, journal={Insurance Mathematics & Economics}, year={2017}, volume={77}, pages={14-23} } Robustness refers to the ability of a model to estimate the cost of capital reliably even when different economic conditions may influence its inputs and implementation, or when the model's assumptions are not fully satisfied. Note: Table presents the variance decompositions (VDC), which show the components of the forecasts error variance of all variables within the panel-VAR. 3 0 obj /Encoding /WinAnsiEncoding /Flags 32 >> Re: Robustness of an economy: Quoted from this wikipedia article: "robustness is the ability of a financial trading system to remain effective under different markets and different market conditions" Effectiveness is the key concept in this definition. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 /XHeight 447 Broll et al. Only in 6 of 223 cases were differences observed (where the syndicated investor used common equity or warrants when the respondent investor used a security involving debt and/or preferred equity). 2 presents the IRFs diagrams for the case that the panel-VAR includes; alpha, the Fraser Index on regulation, an index capturing supervisory disciplinary power, and the risk variable (z-score). In body ) used a bivariate GARCH error correction term capital and private Contracting... 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