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Switching Cost Models as Hypothesis Tests

Author

Listed:
  • Samuel N. Cohen

    (University of Oxford)

  • Timo Henckel

    (Australian National University)

  • Gordon D. Menzies

    (University of Technology & CAMA)

  • Johannes Muhle-Karbe

    (Carnegie Mellon University)

  • Daniel John Zizzo

    (Newcastle University)

Abstract
We relate models based on costs of switching beliefs (e.g. due to inattention) to hypothesis tests. Specifically, for an inference problem with a penalty for mistakes and for switching the inferred value, a band of inaction is optimal. We show this band is equivalent to a confidence interval, and therefore to a two-sided hypothesis test.

Suggested Citation

  • Samuel N. Cohen & Timo Henckel & Gordon D. Menzies & Johannes Muhle-Karbe & Daniel John Zizzo, 2018. "Switching Cost Models as Hypothesis Tests," Working Paper Series 42, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:ecowps:42
    as

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    File URL: https://www.uts.edu.au/sites/default/files/2018-09/Switching%20Cost%20Models%20as%20Hypothesis%20Tests_0.pdf
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    References listed on IDEAS

    as
    1. Albert Altarovici & Johannes Muhle-Karbe & Halil Soner, 2015. "Asymptotics for fixed transaction costs," Finance and Stochastics, Springer, vol. 19(2), pages 363-414, April.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Timo Henckel & Gordon D. Menzies & Peter Moffat & Daniel J. Zizzo, 2019. "Three Dimensions of Central Bank Credibility and Inferential Expectations: The Euro Zone," Working Paper Series 56, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    2. Timo Henckel & Gordon D. Menzies & Peter G. Moffatt & Daniel J. Zizzo, 2022. "Belief adjustment: a double hurdle model and experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 26-67, February.
    3. Hidekazu Yoshioka & Yuta Yaegashi & Motoh Tsujimura & Yumi Yoshioka, 2021. "Cost‐efficient monitoring of continuous‐time stochastic processes based on discrete observations," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 37(1), pages 113-138, January.
    4. Henckel, Timo & Menzies, Gordon D. & Moffatt, Peter & Zizzo, Daniel J., 2019. "Three dimensions of central bank credibility and inferential expectations: The Euro zone," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 294-308.
    5. Samuel N. Cohen & Derek Snow & Lukasz Szpruch, 2021. "Black-box model risk in finance," Papers 2102.04757, arXiv.org.

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    More about this item

    Keywords

    inference; switching cost; inferential expectations; hypothesis test;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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