Simulated Score Methods and Indirect Inference for Continuous-time Models

A. Ronald Gallant, George Tauchen

Research output: Chapter in Book/Report/Conference proceedingChapter

18 Scopus citations

Abstract

This chapter describes a simulated method of moments estimator that is implemented by choosing the vector valued moment function to be the expectation under the structural model of the score function of an auxiliary model, where the parameters of the auxiliary model are eliminated by replacing them with their quasi-maximum likelihood estimates. This leaves a moment vector depending only on the parameters of the structural model. Structural parameter estimates are those parameter values that put the moment vector as closely to zero as possible in a suitable generalized method of moments metric. This methodology can also be interpreted as a practical computational strategy for implementing indirect inference. One argues that considerations from statistical science dictate that the auxiliary model should approximate the true data-generating process as closely as possible and show that using the seminonparametric model is one means to this end. When the view of close approximation is accepted in implementation, the methodology described here is usually referred to as Efficient Method of Moments in the literature because the estimator is asymptotically as efficient as maximum likelihood under correct specification and the detection of model error is assured under incorrect specification.

Original languageEnglish (US)
Title of host publicationHandbook of Financial Econometrics, Vol 1
PublisherElsevier Inc.
Pages427-477
Number of pages51
ISBN (Print)9780444508973
DOIs
StatePublished - Dec 1 2010

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

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