Inference on sets in finance
Name
Chernozhukov_et_al-2015-Quantitative_Economics.pdf
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1.85 MB
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Adobe PDF
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Author(s)
Kocatulum, Emre
Menzel, Konrad
Chernozhukov, Victor V
Date Issued
August 2015
Journal
Quantitative Economics
Publisher
The Econometric Society
Citation
Chernozhukov, Victor et al. “Inference on Sets in Finance.” Quantitative Economics 6, 2 (July 2015): 309–358 © 2015 Victor Chernozhukov, Emre Kocatulum, and Konrad Menzel
Version
Final published version
Abstract
We consider the problem of inference on a class of sets describing a collection of admissible models as solutions to a single smooth inequality. Classical and recent examples include the Hansen–Jagannathan sets of admissible stochastic discount factors, Markowitz–Fama mean–variance sets for asset portfolio returns, and the set of structural elasticities in Chetty's (2012) analysis of demand with optimization frictions. The econometric structure of the problem allows us to construct convenient and powerful confidence regions based on the weighted likelihood ratio and weighted Wald statistics. Our statistics differ from existing statistics in that they enforce either exact or first-order equivariance to transformations of parameters, making them especially appealing in the target applications. We show that the resulting inference procedures are more powerful than the structured projection methods. Last, our framework is also useful for analyzing intersection bounds, namely sets defined as solutions to multiple smooth inequalities, since multiple inequalities can be conservatively approximated by a single smooth inequality. We present two empirical examples showing how the new econometric methods are able to generate sharp economic conclusions. Keywords: Hansen–Jagannathan bound; Markowitz–Fama bounds; Chetty bounds; mean–variance sets; optimization frictions; inference; confidence set
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Creative Commons Attribution-NonCommercial 3.0 Unported
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DOI of Published Version
https://doi.org/10.3982/QE387
