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Select the Valid and Relevant Moments: A One-Step Procedure for GMM with Many Moments

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  • Xu Cheng

    ()
    (Department of Economics, University of Pennsylvania)

  • Zhipeng Liao

    ()
    (Department of Economics, University of California Los Angeles)

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Abstract

This paper considers the selection of valid and relevant moments for the generalized method of moments (GMM) estimation. For applications with many candidate moments, our asymptotic analysis ccommodates a diverging number of moments as the sample size increases. The proposed procedure achieves three objectives in one-step: (i) the valid and relevant moments are selected simultaneously rather than sequentially; (ii) all desired moments are selected together instead of in a stepwise manner; (iii) the parameter of interest is automatically estimated with all selected moments as opposed to a post-selection estimation. The new moment selection method is achieved via an information-based adaptive GMM shrinkage estimation, where an appropriate penalty is attached to the standard GMM criterion to link moment selection to shrinkage estimation. The penalty is designed to signal both moment validity and relevance for consistent moment selection and efficient estimation. The asymptotic analysis allows for non -smooth sample moments and weakly dependent observations, making it generally applicable. For practical implementation, this one-step procedure is computationally attractive.

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File URL: http://economics.sas.upenn.edu/sites/economics.sas.upenn.edu/files/12-045_0.pdf
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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 12-045.

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Length: 46 pages
Date of creation: 26 Nov 2012
Date of revision:
Handle: RePEc:pen:papers:12-045

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Keywords: Adaptive Penalty; GMM; Many Moments; Moment Selection; Oracle Properties; Shrinkage Estimation;

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