Composite Likelihood Estimation of an Autoregressive Panel Probit Model with Random Effects

Bank of Canada Staff Working Paper 2019-16, May 2019

68 Pages Posted: 29 May 2019

Date Written: May 2, 2019

Abstract

Modeling and estimating autocorrelated discrete data can be challenging. In this paper, we use an autoregressive panel probit model where the autocorrelation in the discrete variable is driven by the autocorrelation in the latent variable. In such a non-linear model, the autocorrelation in an unobserved variable results in an intractable likelihood containing high-dimensional integrals. To tackle this problem, we use composite likelihoods that involve much lower order of integration. However, parameter identification becomes problematic since the information employed in lower dimensional distributions may not be rich enough for identification. Therefore, we characterize types of composite likelihoods that are valid for this model and study conditions under which the parameters can be identified. Moreover, we provide consistency and asymptotic normality results of the pairwise composite likelihood estimator and conduct Monte Carlo studies to assess its finite-sample performances. Finally, we apply our method to analyze credit ratings. The results indicate a significant improvement in the estimated probabilities for rating transitions compared with static models.

Keywords: Autocorrelated discrete variables, non-linear panel data models, identification, dynamic binary choice, intractable likelihood, credit ratings

JEL Classification: C23, C25, C58, G24

Suggested Citation

Tuzcuoglu, Kerem, Composite Likelihood Estimation of an Autoregressive Panel Probit Model with Random Effects (May 2, 2019). Bank of Canada Staff Working Paper 2019-16, May 2019. Available at SSRN: https://ssrn.com/abstract=3381994 or http://dx.doi.org/10.2139/ssrn.3381994

Kerem Tuzcuoglu (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
12
Abstract Views
136
PlumX Metrics