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Confidence band for expectation dependence with applications |
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| Affiliation: | 1. College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing, China;2. Research Centre for Soft Energy Science, Nanjing University of Aeronautics and Astronautics, Nanjing, China;3. Department of Finance and Insurance, Lingnan University, Hong Kong;1. Financial Engineering Division, School of Systems and Enterprises, Stevens Institute of Technology, Castle Point on Hudson, Hoboken, NJ 07030, United States;2. Department of Mathematics, Massachusetts College of Liberal Arts, 375 Church Street, North Adams, MA 01247, United States |
| Abstract: | Motivated by the applications of the concept of expectation dependence in economics and finance, we propose a method to construct uniform confidence band for expectation dependence. It is derived based on Hoeffding’s inequality. Our proposed confidence band can be explicitly expressed and thus it is very easy to implement. Our method has applications to demand for a risky asset and first-order risk aversion problems. Simulations suggest our proposed confidence interval can control the coverage probabilities very well, and the average lengths are very short. Two empirical applications are presented to illustrate the usefulness of the constructed confidence band of expectation dependence. |
| Keywords: | Confidence band estimation Demand for a risky asset Expectation dependence First-order risk aversion Hoeffding’s inequality |
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