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Efficient estimation of general dynamic models with a continuum of moment conditions

By M. Carrasco, Mikhail Chernov, Jean-Pierre Florens and E. Ghysels

Abstract

There are two difficulties with the implementation of the characteristic function-based estimators. First, the optimal instrument yielding the ML efficiency depends on the unknown probability density function. Second, the need to use a large set of moment conditions leads to the singularity of the covariance matrix. We resolve the two problems in the framework of GMM with a continuum of moment conditions. A new optimal instrument relies on the double indexing and, as a result, has a simple exponential form. The singularity problem is addressed via a penalization term. We introduce HAC-type estimators for non-Markov models. A simulated method of moments is proposed for non-analytical cases

Topics: HB Economic Theory, HG Finance
Publisher: Elsevier
Year: 2007
DOI identifier: 10.1016/j.jeconom.2006.07.013
OAI identifier: oai:eprints.lse.ac.uk:39394
Provided by: LSE Research Online
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