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Imputing Individual Effects in Dynamic Microsimulation Models. An application of the Rank Method

  • Matteo Richiardi
  • Ambra Poggi

Dynamic microsimulation modeling involves two stages: estimation and forecasting. Unobserved heterogeneity is often considered in estimation, but not in forecasting, beyond trivial cases. Non-trivial cases involve individuals that enter the simulation with a history of previous outcomes. We show that the simple solutions of attributing to these individuals a null effect or a random draw from the estimated unconditional distributions lead to biased forecasts, which are often worse than those obtained neglecting unobserved heterogeneity altogether. We then present a first implementation of the Rank method, a new algorithm for attributing the individual effects to the simulation sample which greatly simplifies those already known in the literature. Out-of-sample validation of our model shows that correctly imputing unobserved heterogeneity significantly improves the quality of the forecasts.

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File URL: http://www.carloalberto.org/assets/working-papers/no.267.pdf
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Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 267.

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Length: 36 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:cca:wpaper:267
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