Professional Documents
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Ashvin Gandhi
1
Harvard University
1
agandhi@fas.harvard.edu
2
Based on previous notes by Daniel Pollmann, Tom Wollmann, and Michael
Sinkinson.
Harvard University Generalized Method of Moments September 16, 2015 1 / 31
General Advice Introduction Theory Estimation and inference Implementation (Matlab) Conclusion
Lectures
I Go to the lectures.
Readings
I Do the reading.
Problem Sets
I Start early.
Sections
I Not weekly.
I Not required.
I Potentially long.
I Hopefully helpful.
Oce Hours
I By appointment.
I Email: agandhi@fas.harvard.edu
Seminars
I Go to as many as possible.
I Familiarize yourself with the tools and how they are used.
Overview
I Objective:
techniques?
I Some technical details, and translating models into moments.
What is GMM?
I GMM is a framework for identifying parameters by leveraging
relations the econometrician would like to hold in expectation:
E [ψ (wi ; θ0 )] = 0.
I Regression:
E [xi i ] = 0.
I Instrumental Variables:
E [zi i ] = 0.
I Maximum likelihood:
∂ log f (Yi |Zi , θ)
E = 0.
∂θ
I Others, less so:
semi-parametric analysis.)
known up to a parameter).
I GMM makes assumptions about the moments of the
distributions.
Moment restriction
E [ψ (wi ; θ)] = 0,
where we call the M -vector ψ (wi ; θ) the moment function, wi
is an observation in the data, and θ is our parameter vector we
want to estimate (dim (θ) = K ).
A Simple Example
I Suppose we have the following model:
yi = xi0 β + i ,
where E (i |xi ) = 0.
I 0 0
Then, E (yi − xi β|xi ) = 0 ⇒ E [(yi − xi β) h (xi )] = 0 for any
function h (·), in particular h (x) = x .
I Hence,
E [ψ (wi ; θ)] = 0,
0
where ψ (wi ; θ) = (yi − xi β) xi .
I In a more general problem, using optimal instruments means
optimal choice of h (·). (See Chamberlain 1987.)
Ω− 1 ,
∂ρjt (θ)
I h∗ (zt ) =
∂θ 0 |zt where E (ρjt |zt ) = 0 and
0
Ω = E ρjt ρjt |zt .
I See, e.g., Berry, Levinsohn, and Pakes (EMA, 1995) (BLP),
Identication
E [ψ (wi ; θ)] = 0
only holds at the true value θ = θ0 , and that at all other values of
the parameter vector, it does not hold.
Consistency
Eciency
I We want to know whether our estimates are as precise as
possible. The ML estimator achieves the smallest variance
among all unbiased estimators in the parametric setting:
2
∂
= (θ) = −E ln f (X |θ)
∂θ∂θ0
I We call = (θ) the Fisher Information matrix, and we call
−1
= (θ0 ) the Cramer-Rao lower bound on variance
Estimation
Asymptotic variance
I Under appropriate assumptions,
√
d
n θ̂ − θ0 −→ N (0, V ) ,
where
−1 0 − 1
V = Γ0 C Γ Γ C ∆C Γ Γ0 C Γ .
h i
∂ψ
I Γ=E ∂θ (x, θ0 ) (M × K ): gradient of the moment function
∆ = E ψ (x, θ0 ) ψ (x, θ0 )0 (M × M ):
I outer product of the
moments
Just-identied case
−1 −1
V = Γ0 C Γ Γ0 C ∆C Γ Γ0 C Γ
= Γ−1 C −1 Γ0−1 Γ0 C ∆C ΓΓ−1 C −1 Γ0−1
= Γ−1 ∆Γ0−1
− 1
= Γ0 ∆−1 Γ ,
Over-identied case
For C = ∆−1 ,
−1 − 1
V = Γ0 C Γ Γ0 C ∆C Γ Γ0 C Γ
− 1 0 − 1 −1
= Γ0 ∆−1 Γ Γ ∆ ∆∆−1 Γ Γ0 ∆−1 Γ
− 1
= Γ0 ∆−1 Γ
− 1
The proof that (Γ0 C Γ)−1 Γ0 C ∆C Γ (Γ0 C Γ)−1 − Γ0 ∆−1 Γ ≥0
(positive semi-denite) can be found in virtually every econometrics
text or lecture notes. This proves that C = ∆−1 is indeed optimal.
Two-step GMM
Linear IV example
observation
I The answer will be stored in a variable beta
I @(b) means the routine will attempt to minimize the
betastart
I The routine will follow the specications in the options set
...
val = mean(moment);
Evaluating gradients
f (x + h) − f (x − h)
f 0 (x) ≈
2h
I See Judd (1998, Ch. 7) for details.
Conclusion
I Questions?