Efficient Estimation Using the Characteristic Function

47 Pages Posted: 19 Oct 2013

See all articles by Marine Carrasco

Marine Carrasco

University of Montreal - Departement de Ciences Economiques

Rachidi Kotchoni

Université Paris Nanterre; African Development Bank

Date Written: July 18, 2013

Abstract

The method of moments proposed by Carrasco and Florens (2000) permits to fully exploit the information contained in the characteristic function and yields an estimator which is asymptotically as efficient as the maximum likelihood estimator. However, this estimation procedure depends on a regularization or tuning parameter ∝ that needs to be selected. The aim of the present paper is to provide a way to optimally choose ∝ by minimizing the approximate mean square error (AMSE) of the estimator. Following an approach similar to that of Newey and Smith (2004), we derive a higher-order expansion of the estimator from which we characterize the finite sample dependence of the AMSE on ∝. We provide a data-driven procedure for selecting the regularization parameter that relies on parametric bootstrap. We show that this procedure delivers a root T consistent estimator of ∝. Moreover, the data-driven selection of the regularization parameter preserves the consistency, asymptotic normality and efficiency of the CGMM estimator. Simulation experiments based on a CIR model show the relevance of the proposed approach.

Keywords: Conditional moment restriction, continuum of moment conditions, generalized method of moments, mean square error, stochastic expansion, Tikhonov regularization

JEL Classification: C00, C13, C15

Suggested Citation

Carrasco, Marine and Kotchoni, Rachidi, Efficient Estimation Using the Characteristic Function (July 18, 2013). CIRANO - Scientific Publications 2013s-22, Available at SSRN: https://ssrn.com/abstract=2342174 or http://dx.doi.org/10.2139/ssrn.2342174

Marine Carrasco (Contact Author)

University of Montreal - Departement de Ciences Economiques ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada
(514) 343-2394 (Phone)

HOME PAGE: http://www.sceco.umontreal.ca/liste_personnel/carrasco/index.htm

Rachidi Kotchoni

Université Paris Nanterre ( email )

200 Avenue de la République
Nanterre, Hauts de Seine 92000
France

African Development Bank ( email )

Rue Joseph Anoma
Abidjan, Ivory Coast 01 BP 1387
Ivory Coast (Cote D'ivoire)

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