Events and Meetings of Italian Statistical Society, Statistics and Demography: the Legacy of Corrado Gini

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A Potential Contradiction between Economic Theory and Applied Finance
Shlomo Yitzhaki

Last modified: 2015-09-04

Abstract


One of the basic assumptions that characterizes economic theory in Finance is the assumption of declining marginal utility of income. One of the popular methods of analyzing empirical evidence by economists is the Ordinary Least Squares Regression. This paper argues that in some cases of violation of the assumptions by the data, there may be a contradiction between the two approaches. The paper suggests the use of the Gini regression to bridge the gap between economic theory and regression.

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