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Report
Instrumental variables procedures for estimating linear rational expectations models
A prediction formula for geometrically declining sums of future forcing variables is derived for models in which the forcing variables are generated by a vector autoregressive-moving average process. This formula is useful in deducing and characterizing cross-equation restrictions implied by linear rational expectations models.
Working Paper
Formulating and estimating dynamic linear rational expectations models
This paper describes methods for conveniently formulating and estimating dynamic linear econometric models under the hypothesis of rational expectations. An econometrically convenient formula for the cross-equation rational expectations restrictions is derived. Models of error terms and the role of the concept of Granger causality in formulating rational expectations models are both discussed. Tests of hypothesis of strict econometric exogeneity along the lines of Sim?s are compared with a test that is related to Wu?s.
Report
Assessing specification errors in stochastic discount factor models
In this paper we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on chi-squared statistics associated with null hypotheses that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of methods in assessing some alternative stochastic factor models ...
Discussion Paper
Implications of security market data for models of dynamic economies
We show how to use security market data to restrict the admissible region for means and standard deviations of intertemporal marginal rates of substitution (IMRSs) of consumers. Our approach is (i) nonparametric and applies to a rich class of models of dynamic economies; (ii) characterizes the duality between the mean-standard deviation frontier for IMRSs and the familiar mean-standard deviation frontier for asset returns; and (iii) exploits the restriction that IMRSs are positive random variables. The region provides a convenient summary of the sense in which asset market data are anomalous ...
Report
Exact linear rational expectations models: specification and estimation
This paper describes how to specify and estimate rational expectations models in which there are exact linear relationships among variables and expectations of variables that the econometrician observes.
Report
Rational expectations models and the aliasing phenomenon
This paper shows how the cross-equation restrictions delivered by the hypothesis of rational expectations can serve to solve the aliasing identification problem. It is shown how the rational expectations restrictions uniquely identify the parameters of a continuous time model from statistics of discrete time models.
Working Paper
Examining macroeconomic models through the lens of asset pricing
Dynamic stochastic equilibrium models of the macro economy are designed to match the macro time series including impulse response functions. Since these models aim to be structural, they also have implications for asset pricing. To assess these implications, we explore asset pricing counterparts to impulse response functions. We use the resulting dynamic value decomposition (DVD) methods to quantify the exposures of macroeconomic cash flows to shocks over alternative investment horizons and the corresponding prices or compensations that investors must receive because of the exposure to such ...
Report
Methods for estimating continuous time Rational Expectations models from discrete time data
This paper describes methods for estimating the parameters of continuous time linear stochastic rational expectations models from discrete time observations. The economic models that we study are continuous time, multiple variable, stochastic, linear-quadratic rational expectations models. The paper shows how such continuous time models can properly be used to place restrictions on discrete time data. Various heuristic procedures for deducing the implications for discrete time data of these models, such as replacing derivatives with first differences, can sometimes give rise to very ...
Report
On the mechanics of forming and estimating dynamic linear economies
This paper catalogues formulas that are useful for estimating dynamic linear economic models. We describe algorithms for computing equilibria of an economic model and for recursively computing a Gaussian likelihood function and its gradient with respect to parameters. We apply these methods to several example economies.