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Improved small sample inference for efficient method of moments and indirect inference estimators

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  • Veronika Czellar

    (HEC Paris)

  • Eric Zivot

    (Department of Economic, University of Washington)

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    Abstract

    The efficient method of moments (EMM) and indirect inference (II) are two widely used simulation-based techniques for estimating structural models that have intractable likelihood functions. The poor performance in finite samples of traditional coefficient and overidentification tests based on the EMM or II objective function indicates a failure of first order asymptotic theory for the distribution of these tests, especially for EMM. We propose practically feasible saddlepoint coefficcient tests for hypotheses on structural coefficients estimated by II and EMM that are asymptotically chi-square distributed and have much better finite sample performance than traditional tests. To construct the tests, we make use of the fact that II and EMM estimators have asymptotically equivalent M-estimators and then use the coefficient saddlepoint tests for M-estimators developed by Robinson, Ronchetti and Young (2003). We evaluate the nite sample behavior of our coeffucient saddlepoint tests by Monte Carlo methods using a MA(1) model. Whereas traditional likelihood-ratio type tests can exhibit substantial size distortions,we show that our saddlepoint tests do not. We also find that the size-adjusted power of our saddlepoint tests is similar to and sometimes greater than the power of traditional tests.

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    Bibliographic Info

    Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2008-04.

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    Date of creation: Apr 2008
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    Handle: RePEc:udb:wpaper:uwec-2008-04

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    1. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
    2. Eric GHYSELS & Lynda KHALAF & Cosmé VODOUNOU, 2003. "Simulation Based Inference In Moving Average Models," Annales d'Economie et de Statistique, ENSAE, issue 69, pages 85-99.
    3. Michaelides, Alexander & Ng, Serena, 2000. "Estimating the rational expectations model of speculative storage: A Monte Carlo comparison of three simulation estimators," Journal of Econometrics, Elsevier, vol. 96(2), pages 231-266, June.
    4. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers 92.279, Toulouse - GREMAQ.
    5. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S63-84, Suppl. De.
    6. Ortelli, Claudio & Trojani, Fabio, 2005. "Robust efficient method of moments," Journal of Econometrics, Elsevier, vol. 128(1), pages 69-97, September.
    7. Bansal, Ravi & Gallant, A. Ronald & Hussey, Robert & Tauchen, George, 1995. "Nonparametric estimation of structural models for high-frequency currency market data," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 251-287.
    8. Genton, Marc G. & de Luna, Xavier, 2000. "Robust simulation-based estimation," Statistics & Probability Letters, Elsevier, vol. 48(3), pages 253-259, July.
    9. Rómulo A. Chumacero, 1997. "Finite Sample Properties of the Efficient Method of Moments," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(2), pages 2.
    10. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(04), pages 657-681, October.
    11. Gregory R. Duffee, 2008. "Evidence on Simulation Inference for Near Unit-Root Processes with Implications for Term Structure Estimation," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(1), pages 108-142, Winter.
    12. Rómulo A. Chumacero, 2001. "Estimating ARMA Models Efficiently," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(2), pages 1.
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