Financial models often use unexpected explanatory variables. Conventionally, these are generated as the residuals of auxiliary equations, which are then substituted into the model of interest in a second step. This induces an econometric problem into the estimates, which is typically ignored. We propose a maximum likelihood estimation method as a solution. While there may be a predisposition when using financial data to dismiss our method as difficult to specify correctly, Monte Carlo simulations show that our method is robust. Further, we show that the magnitude of errors due to the generated regressor problem is somewhat larger than that due to ignoring the effects of plausible levels of leptokurtosis. An empirical example using commercial bank stock returns finds that hypothesis test conclusions from the conventional method can often be overturned.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Sep 30, 2004
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera