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Integrating Structural and Reduced-Form Methods in Empirical Finance

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  • Toni M Whited

Abstract

I discuss various ways in which inference based on the estimation of the parameters of statistical models (reduced-form estimation) can be combined with inference based on the estimation of the parameters of economic models (structural estimation). I discuss five basic categories of integration: directly combining the two methods, using statistical models to simplify structural estimation, using structural estimation to extend the validity of reduced-form results, using reduced-form techniques to assess the external validity of structural estimations, and using structural estimation as a sample selection remedy. I illustrate each of these methods with examples from corporate finance, banking, and personal finance. I conclude by exploring the role of robust estimation techniques in structural estimation in corporate finance.

Suggested Citation

  • Toni M Whited, 2023. "Integrating Structural and Reduced-Form Methods in Empirical Finance," Journal of Financial Econometrics, Oxford University Press, vol. 21(3), pages 597-615.
    • Handle: RePEc:oup:jfinec:v:21:y:2023:i:3:p:597-615.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbac036
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    1. Cronqvist, Henrik & Ladika, Tomislav & Pazaj, Elisa & Sautner, Zacharias, 2024. "Limited attention to detail in financial markets: Evidence from reduced-form and structural estimation," Journal of Financial Economics, Elsevier, vol. 154(C).

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    More about this item

    Keywords

    external validity; integration; robust estimation; sample selection; structural estimation;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G50 - Financial Economics - - Household Finance - - - General

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