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Gresham's Law of Model Averaging

Title
Gresham's Law of Model Averaging
Author
조인구
Keywords
LARGE DEVIATIONS; NASH EQUILIBRIUM; STOCK-MARKET; LONG-RUN; UNCERTAINTY; VOLATILITY; FORECASTS
Issue Date
2017-10
Publisher
AMER ECONOMIC ASSOC
Citation
AMERICAN ECONOMIC REVIEW, v. 107, no. 11, page. 3589-3616
Abstract
A decision maker doubts the stationarity of his environment. In response, he uses two models, one with time-varying parameters, and another with constant parameters. Forecasts are then based on a Bayesian model averaging strategy, which mixes forecasts from the two models. In reality, structural parameters are constant, but the (unknown) true model features expectational feedback, which the reduced-form models neglect. This feedback permits fears of parameter instability to become self-confirming. Within the context of a standard asset-pricing model, we use the tools of large deviations theory to show that even though the constant parameter model would converge to the rational expectations equilibrium if considered in isolation, the mere presence of an unstable alternative drives it out of consideration.
URI
https://www.aeaweb.org/articles?id=10.1257/aer.20160665https://repository.hanyang.ac.kr/handle/20.500.11754/115799
ISSN
0002-8282; 1944-7981
Appears in Collections:
COLLEGE OF ECONOMICS AND FINANCE[S](경제금융대학) > ECONOMICS & FINANCE(경제금융학부) > Articles
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