The objective function of simulation estimators near the boundary of the unstable region of the parameter space
Abstract
The paper examines the role of stability constraints in estimation by dynamic simulation.
In particular, it analyzes the behavior of the objective function on either side of
the boundary of the stability region of the parameter space. The main finding is that
stability constraints may be ignored because the simulation-based objective function
contains a built-in penalty to enforce stability. A key caveat, however, is that the
dynamic stability of the auxiliary model that defines the moment conditions must be
checked and enforced. An attempt to fit via simulation to moments defined by a dynamically
unstable auxiliary model can be expected to lead to an ill-behaved objective function.
Type
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https://hdl.handle.net/10161/2001Collections
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George E. Tauchen
William Henry Glasson Distinguished Professor Emeritus
George Tauchen is the William Henry Glasson Professor of Economics and professor of
finance at the Fuqua School of Business. He joined the Duke faculty in 1977 after
receiving his Ph.D. from the University of Minnesota. He did his undergraduate work
at the University of Wisconsin. Professor Tauchen is a fellow of the Econometric Society,
the American Statistical Association, the Journal of Econometrics, and the Society
for Financial Econometrics (SoFie). He is also the 2003 Duke University Sc

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