Nonparametric methods and local-time-based estimation for dynamic power law distributions (replication data)

DOI

This paper introduces nonparametric econometric methods that characterize general power law distributions under basic stability conditions. These methods extend the literature on power laws in the social sciences in several directions. First, we show that any stationary distribution in a random growth setting is shaped entirely by two factors: the idiosyncratic volatilities and reversion rates (a measure of cross-sectional mean reversion) for different ranks in the distribution. This result is valid regardless of how growth rates and volatilities vary across different economic agents, and hence applies to Gibrat's law and its extensions. Second, we present techniques to estimate these two factors using panel data. Third, we describe how our results imply predictability as higher-ranked processes must on average grow more slowly than lower-ranked processes. We employ our empirical methods using data on commodity prices and show that our techniques accurately describe the empirical distribution of relative commodity prices. We also show that rank-based out-of-sample forecasts of future commodity prices outperform random-walk forecasts at a 1-month horizon.

Identifier
DOI https://doi.org/10.15456/jae.2022326.0707842409
Metadata Access https://www.da-ra.de/oaip/oai?verb=GetRecord&metadataPrefix=oai_dc&identifier=oai:oai.da-ra.de:775426
Provenance
Creator Fernholz, Ricardo T.
Publisher ZBW - Leibniz Informationszentrum Wirtschaft
Publication Year 2017
Rights Creative Commons Attribution 4.0 (CC-BY); Download
OpenAccess true
Contact ZBW - Leibniz Informationszentrum Wirtschaft
Representation
Language English
Resource Type Collection
Discipline Economics