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Classical Estimation Methods for LDV Models Using Simulation

This paper discusses estimation methods for limited dependent variable (LDV) models that employ Monte Carlo simulation techniques to overcome computational problems in such models. These difficulties take the form of high dimensional integrals that need to be calculated repeatedly but cannot be easily approximated by series expansions. In the past, investigators were forced to restrict attention to special classes of LDV models that are computationally manageable. The simulation estimation methods we discuss here make it possible to estimate LDV models that are computationally intractable using classical estimation methods. We first review the ways in which LDV models arise, describing the differences and similarities in censored and truncated data generating processes. Censoring and truncation give rise to the troublesome multivariate integrals. Following the LDV models, we described various simulation methods for evaluating such integrals. Naturally, censoring and truncation play roles in simulation as well. Finally, estimation methods that rely on simulation are described. We review three general approaches that combine estimation of LDV models and simulation: simulation of the log-likelihood function (MLS), simulation of moment functions (MSM), and simulation of the score (MSS). The MSS is a combination of ideas from MSL and MSM, treading the efficient score of the log-likelihood function as a moment function. We use the rank ordered probit model as an illustrative example to investigate the comparative properties of these simulation estimation approaches.

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File URL: http://cowles.econ.yale.edu/P/cd/d10b/d1051.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1051.

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Length: 46 pages
Date of creation: Jul 1993
Date of revision:
Publication status: Published in R.F. Engle and D.L. McFadden, eds., Handbook of Econometrics, Vol. IV, 1994, 2384-2441
Handle: RePEc:cwl:cwldpp:1051
Note: See CFP 886
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