Bayesian inference based only on simulated likelihood: particle filter analysis of dynamic economic models

Neil Shephard and Thomas Flury
Authors registered in the RePEc Author Service: David F. Hendry and Jurgen A. Doornik

No 4, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Suppose we wish to carry out likelihood based inference but we solely have an unbiased simulation based estimator of the likelihood. We note that unbiasedness is enough when the estimated likelihood is used inside a Metropolis-Hastings algorithm. This result has recently been introduced in statistics literature by Andrieu, Doucet, and Holenstein (2007) and is perhaps surprising given the celebrated results on maximum simulated likelihood estimation. Bayesian inference based on simulated likelihood can be widely applied in microeconomics, macroeconomics and financial econometrics. One way of generating unbiased estimates of the likelihood is by the use of a particle filter. We illustrate these methods on four problems in econometrics, producing rather generic methods. Taken together, these methods imply that if we can simulate from an economic model we can carry out likelihood based inference using its simulations.

Date: 2008-12-01
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Citations: View citations in EconPapers (12)

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