Using Implied Probabilities to Improve Estimation with Unconditional Moment Restrictions

CIRPEE Working Paper No. 07-47

42 Pages Posted: 24 Dec 2007

See all articles by Alain Guay

Alain Guay

University of Quebec at Montreal (UQAM) - Centre de recherche sur l'emploi et les fluctuations économiques (CREFÉ)

Florian Pelgrin

EDHEC Business School; EDHEC Business School

Date Written: December 2007

Abstract

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

Guay, Alain and Pelgrin, Florian, Using Implied Probabilities to Improve Estimation with Unconditional Moment Restrictions (December 2007). CIRPEE Working Paper No. 07-47. Available at SSRN: https://ssrn.com/abstract=1077584 or http://dx.doi.org/10.2139/ssrn.1077584

Alain Guay (Contact Author)

University of Quebec at Montreal (UQAM) - Centre de recherche sur l'emploi et les fluctuations économiques (CREFÉ) ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada
(514) 987-3000 (Phone)
(514) 987-8494 (Fax)

Florian Pelgrin

EDHEC Business School ( email )

France
Switzerland

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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