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Simulated nonparametric estimation of dynamic models with applications to finance

Altissimo, Filippo and Mele, Antonio (2005) Simulated nonparametric estimation of dynamic models with applications to finance. Discussion paper, 539. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Identification Number: 539

Abstract

This paper introduces a new class of parameter estimators for dynamic models, called Simulated Nonparametric Estimators (SNE). The SNE minimizes appropriate distances between nonparametric joint (or conditional) densities estimated from sample data and nonparametric joint (or conditional) densities estimated from data simulated out of the model of interest. Sample data and model-simulated data are smoothed with the same kernel. This makes the SNE: 1) consistent independently of the amount of smoothing (up to identifiability); and 2) asymptotically root-T normal when the smoothing parameter goes to zero at a reasonably mild rate. Furthermore, the estimator displays the same asymptotic efficiency properties as the maximum-likelihood estimator as soon as the model is Markov in the observable variables. The methods are flexible, simple to implement, and fairly fast; furthermore, they possess finite sample properties that are well approximated by the asymptotic theory. These features are illustrated within the typical estimation problems arising in financial economics.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2005 The Authors
Subjects: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 30 Jul 2009 08:59
Last Modified: 27 Feb 2014 15:35
URI: http://eprints.lse.ac.uk/id/eprint/24658

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