Eecient Method of Moments 1


We describe a computationally intensive methodology for the estimation and analysis of partially observable nonlinear systems. An example from epidemiology is the SEIR model, which is a system of di erential equations with random coe cients that describes a population in terms of four state variables: those susceptible to a disease, those exposed to it, those infected by it, and those recovered from it. Only those infected by the disease are known to public health o cials. An example from nance is the continuous-time stochastic volatility model, which is a system of stochastic di erential equations that describes a security's price and instantaneous variance. Only the security's price can be observed directly. System parameters are estimated by a variant of simulated method of moments known as e cient method of moments (EMM). The idea is to the match moments implied by the system to moments implied by the transition density for observables. System analysis is accomplished by reprojection. Reprojection is carried out by projecting a long simulation from the estimated system onto an appropriate representation of a relationship of interest. A general purpose representation is a Hermite expansion of the conditional density of state variables given observables. A reprojection density thus obtained embodies all constraints implied by the nonlinear system and is analytically convenient. As an instance, nonlinear ltering can be accomplished by computing the conditional mean of the reprojection density and evaluating it at observed values from the data. Ideas are illustrated by using the methodology to assess the dynamics of a stochastic volatility model for daily Microsoft closing prices.

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@inproceedings{Gallant2001EecientMO, title={Eecient Method of Moments 1}, author={Ronald Gallant and George Tauchen}, year={2001} }