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Estimating Continuous-Time Income Models

Author

Listed:
  • Christian Schluter
  • Mark Trede
Abstract
A fundamental component of inter-temporal consumption-saving and portfolio allocation models is a statistical model of the income process. While income processes are commonly unobservable income flows which evolve in continuous time, observable income data are usually discrete, having been aggregated over time. We consider continuous-time earning processes, specifically non-linearly transformed Ornstein-Uhlenbeck processes, and the associated integrated, i.e. time aggregated process. Both processes are characterized, and we show that time aggregation alters important statistical properties. The parameters of the earning process are estimable by GMM, and the finite sample properties of the estimator are investigated. Our methods are applied to annual earnings data for the US. It is demonstrated that the model replicates well important features of the earnings distribution.

Suggested Citation

  • Christian Schluter & Mark Trede, 2011. "Estimating Continuous-Time Income Models," CQE Working Papers 1811, Center for Quantitative Economics (CQE), University of Muenster.
    • Handle: RePEc:cqe:wpaper:1811
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    File URL: https://www.wiwi.uni-muenster.de/cqe/sites/cqe/files/CQE_Paper/CQE_WP_18_2011.pdf
    File Function: Version of January, 2011
    Download Restriction: no
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    Citations

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    Cited by:

    1. Babai, M. Zied & Ali, Mohammad M. & Nikolopoulos, Konstantinos, 2012. "Impact of temporal aggregation on stock control performance of intermittent demand estimators: Empirical analysis," Omega, Elsevier, vol. 40(6), pages 713-721.

    More about this item

    Keywords

    income processes; integrated non-linearly transformed Ornstein-Uhlenbeck process; temporal aggregation;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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