The objective function of simulation estimators near the boundary of the unstable region of the parameter space
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1998
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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.
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Scholars@Duke
George E. Tauchen
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 Scholar/Teacher of the Year. Professor Tauchen is an internationally known time series econometrician. He has developed several important new techniques for making statistical inference from financial time series data and for testing models of financial markets. He has given invited lectures at many places around the world, including London, Paris, Beijing, Taipei, Hong Kong, and Sydney. His current research (with Professor Li of Duke) examines the impact of large jump-like moves in stock market returns on the returns of various portfolios and individual securities. He is a former editor of the Journal of Business and Economic Statistics (JBES) and former associate editor of Econometrica, Econometric Theory, The Journal of the American Statistical Association (JASA), and JBES. He is currently Co-Editor of the Journal of Financial Econometrics.
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