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Structural estimation of real options models
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Gamba, Andrea and Tesser, Matteo (2009) Structural estimation of real options models. Journal of Economic Dynamics and Control, Vol.33 (No.4). pp. 798-816. doi:10.1016/j.jedc.2008.10.001 ISSN 0165-1889.
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Official URL: http://dx.doi.org/10.1016/j.jedc.2008.10.001
Abstract
We propose a numerical approach for structural estimation of a class of discrete (Markov) decision processes emerging in real options applications. The approach is specifically designed to account for two typical features of aggregate data sets in real options: the endogeneity of firms’ decisions; the unobserved heterogeneity of firms. The approach extends the nested fixed point algorithm by Rust [1987. Optimal replacement of GMC bus engines: an empirical model of Harold Zurcher. Econometrica 55(5), 999–1033; 1988. Maximum likelihood estimation of discrete control processes. SIAM Journal of Control and Optimization 26(5), 1006–1024] because both the nested optimization algorithm and the integration over the distribution of the unobserved heterogeneity are accommodated using a simulation method based on a polynomial approximation of the value function and on recursive least squares estimation of the coefficients. The Monte Carlo study shows that omitting unobserved heterogeneity produces a significant estimation bias because the model can be highly non-linear with respect to the parameters.
Item Type: | Journal Article | ||||
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Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Journal or Publication Title: | Journal of Economic Dynamics and Control | ||||
Publisher: | Elsevier BV | ||||
ISSN: | 0165-1889 | ||||
Official Date: | 2009 | ||||
Dates: |
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Volume: | Vol.33 | ||||
Number: | No.4 | ||||
Number of Pages: | 19 | ||||
Page Range: | pp. 798-816 | ||||
DOI: | 10.1016/j.jedc.2008.10.001 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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