Using Implied Probabilities to Improve Estimation with Unconditional Moment Restrictions
CIRPEE Working Paper No. 07-47
42 Pages Posted: 24 Dec 2007
Date Written: December 2007
In this paper, we investigate the information content of implied probabilities (Back and Brown, 1993) to improve estimation in unconditional moment conditions models. We propose and evaluate two 3-step euclidian empirical likelihood estimators and their bias-correction versions for weakly dependant data. The first one is the time series extension of the 3S-EEL proposed by Antoine, Bonnal and Renault (2007). The second one is new and uses in contrast only an estimator of the weighting matrix at an efficient 2-step GMM estimator, while leaving unrestricted the Jacobian matrix. Both estimators use implied probabilities to achieve higher-order improvements relative to the traditional GMM estimator. A Monte-Carlo study reveals that the finite and large sample properties of the (bias-corrected) 3-step estimators compare very favorably to the existing approaches: the 2-step GMM and the continuous updating estimator. As an application, we re-assess the empirical evidence regarding the New Keynesian Phillips curve in the US.
Keywords: Information-based inference, Implied probabilities, Weak identification, Generalized method of moments, Phillips curve
JEL Classification: C13, C14, E31
Suggested Citation: Suggested Citation