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On the Estimation of Euler Equations in the Presence of a Potential Regime Shift
Author(s) -
Saikkonen Pentti,
Ripatti Antti
Publication year - 2000
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.68.s1.6
Subject(s) - autoregressive model , estimator , monte carlo method , euler equations , mathematics , marginal model , generalized method of moments , econometrics , simple (philosophy) , euler's formula , euler method , conditional expectation , mathematical optimization , economics , mathematical analysis , statistics , regression analysis , philosophy , epistemology
The concept of a peso problem is formalized in terms of a linear Euler equation and a non‐linear marginal model describing the dynamics of the exogenous variable driving the process. It is shown that, using a threshold autoregressive model as a marginal model, it is possible to produce time‐varying peso premia. A Monte Carlo method and a method based on the numerical solution of integral equations are considered as tools for computing conditional future expectations in the marginal model. A Monte Carlo study illustrates the poor performance of the generalized method of moments estimator in small and even relatively large samples. The poor performance is particularly acute in the presence of a peso problem but is also serious in the simple linear case.