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Using Implied Probabilities to Improve Estimation with Unconditional Moment Restrictions

  • Alain Guay
  • Florian Pelgrin
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    In this paper, we investigate the information content of implied probabilities (Back and Brown, 1993) to improve estimation in unconditional moment conditions models. We propose and evaluate two 3-step euclidian empirical likelihood estimators and their bias-correction versions for weakly dependent data. The first one is the time series extension of the 3S-EEL proposed by Antoine, Bonnal and Renault (2007).The second one is new and uses in contrast only an estimator of the weighting matrix at an efficient 2-step GMM estimator, while leaving unrestricted the Jacobian matrix. Both estimators use implied probabilities to achieve higher-order improvements relative to the traditional GMM estimator. A Monte-Carlo study reveals that the finite and large sample properties of the (bias-corrected) 3-step estimators compare very favorably to the existing approaches: the 2-step GMM and the continuous updating estimator. As an application, we re-assess the empirical evidence regarding the New Keynesian Phillips curve in the US.

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    Paper provided by CIRPEE in its series Cahiers de recherche with number 0747.

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    Date of creation: 2007
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    Handle: RePEc:lvl:lacicr:0747
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