Approximate maximum likelihood for complex structural models

Veronika Czellar, David T. Frazier and Eric Renault

Journal of Econometrics, 2022, vol. 231, issue 2, 432-456

Abstract: Indirect Inference (I-I) is a popular technique for estimating complex parametric models whose likelihood function is intractable, however, the statistical efficiency of I-I estimation is questionable. While the efficient method of moments, Gallant and Tauchen (1996), promises efficiency, the price to pay for this efficiency is a loss of parsimony and thereby a potential lack of robustness to model misspecification. This stands in contrast to simpler I-I estimation strategies, which are known to display less sensitivity to model misspecification due in large part to their focus on specific elements of the underlying structural model. In this research, we propose a new simulation-based approach that maintains the parsimony of I-I estimation, which is often critical in empirical applications, but can also deliver estimators that are nearly as efficient as maximum likelihood. This new approach is based on using a constrained approximation to the structural model, which ensures identification and can deliver estimators that are consistent and nearly efficient. We demonstrate this approach through several examples, and show that this approach can deliver estimators that are nearly as efficient as maximum likelihood, when feasible, but can be employed in many situations where maximum likelihood is infeasible.

Keywords: Equality restrictions; Constrained inference; Indirect inference; Generalized Tobit; Markov-switching multifractal models (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:231:y:2022:i:2:p:432-456

DOI: 10.1016/j.jeconom.2021.05.009

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