The Basics of Financial Econometrics: Tools, Concepts, and Asset Management Applications

CHAPTER 13

Model Estimation

After reading this chapter you will understand:

• The concept of estimation and estimators.
• The properties of estimators.
• The least-squares estimation method.
• How to apply the least-squares method.
• The use of ordinary least squares, weighted least squares, and generalized least squares.
• The maximum likelihood estimation method.
• How to apply the maximum likelihood method.
• The instrumental variables approach to estimation.
• The method of moments and its generalizations.
• How to apply the method of moments.

In the previous chapters of this book, we have described the most commonly used financial econometric techniques. However, with the exception of our discussion of the simple linear regression in Chapter 2, we purposely did not focus on methods for estimating parameters of the model. As we mentioned in the preface, we did not do so because most users of financial econometric techniques utilize commercial software where the vendor utilizes the latest estimation techniques. Nevertheless, it is still important to understand the various estimation methods that can be applied to specific models. In this chapter, we discuss these methods. We begin by discussing the concept of estimation and the concept of sampling distributions.

STATISTICAL ESTIMATION AND TESTING

All of the financial econometric models that we have described in this book have parameters that must be estimated. Statistical estimation is a set of criteria and methodologies for determining the best ...