Financial Risk Manager Part 1

Explanation

Correct Answer: B

Econometric models are primarily focused on understanding and explaining the underlying relationships and causal mechanisms in economic data, rather than making predictions. This fundamental difference in purpose explains why validation samples are less commonly used in econometrics compared to machine learning.

Key Points:

1. Purpose of Econometric Models:

   • Econometrics aims to test economic theories and understand causal relationships
   • The focus is on parameter estimation and hypothesis testing about economic relationships
   • Models are evaluated based on theoretical consistency and statistical significance

2. Purpose of Machine Learning Models:

   • Machine learning focuses on prediction accuracy and generalization
   • Validation samples are crucial for assessing predictive performance on unseen data
   • Cross-validation helps prevent overfitting and ensures model robustness

3. Research Objectives:

   • Econometric researchers are more concerned with whether estimated coefficients align with economic theory
   • Statistical inference and hypothesis testing are prioritized over predictive accuracy
   • The emphasis is on understanding "why" rather than "what will happen"

4. Model Evaluation Criteria:

   • Econometrics: R-squared, t-statistics, F-tests, diagnostic tests for model assumptions
   • Machine Learning: Accuracy, precision, recall, F1-score, ROC curves on validation data

While validation samples can still be useful in econometrics, they are not as central to the evaluation process as in predictive modeling contexts.