Select the Valid and Relevant Moments: A One-Step Procedure for GMM with Many Moments

45 Pages Posted: 21 Nov 2012

See all articles by Xu Cheng

Xu Cheng

University of Pennsylvania - Department of Economics

Zhipeng Liao

University of California, Los Angeles (UCLA) - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: November 15, 2012

Abstract

This paper considers the selection of valid and relevant moments for the generalized method of moments (GMM) estimation. For applications with many candidate moments, our asymptotic analysis accommodates a diverging number of moments as the sample size increases. The proposed procedure achieves three objectives in one-step: (i) the valid and relevant moments are selected simultaneously rather than sequentially; (ii) all desired moments are selected together instead of in a stepwise manner; (iii) the parameter of interest is automatically estimated with all selected moments as opposed to a post-selection estimation. The new moment selection method is achieved via an information-based adaptive GMM shrinkage estimation, where an appropriate penalty is attached to the standard GMM criterion to link moment selection to shrinkage estimation. The penalty is designed to signal both moment validity and relevance for consistent moment selection and efficient estimation. The asymptotic analysis allows for non-smooth sample moments and weakly dependent observations, making it generally applicable. For practical implementation, this one-step procedure is computationally attractive.

Keywords: Adaptive Penalty, GMM, Many Moments, Moment Selection, Oracle Properties, Shrinkage Estimation

JEL Classification: C12, C13, C36

Suggested Citation

Cheng, Xu and Liao, Zhipeng, Select the Valid and Relevant Moments: A One-Step Procedure for GMM with Many Moments (November 15, 2012). Available at SSRN: https://ssrn.com/abstract=2179138 or http://dx.doi.org/10.2139/ssrn.2179138

Xu Cheng

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.sas.upenn.edu/~xucheng/

Zhipeng Liao (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

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