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Toni M. Whited
October 2015
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Outline
What is it?
Why do it?
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
constraints
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Structural Estimation
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
GMM
MLE
SMM
SMLE
Indirect Inference
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
In both cases
The simulation estimators are used with models without
closed-form estimating equations.
GMM and MLE are used with models with closed-form estimating
equations.
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
The goal of the model is usually not to present new theory, but
to present a formal structure through which to view data.
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
policy function: maps the state variables into the choice variables
Then you can use a random number generator and the policy
function to simulate data.
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Structural estimation:
Infer parameter values from the data
An empirical exercise
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Both:
Can assess how well model fits the datano statistical tests with
calibration
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Structural
Why does X affect Y?
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Structural
Often the only feasible option for answering certain important
questions
Tough to find good instruments
The connection between theory and tests of theory is extremely
tight, which allows more transparent interpretation of any results. In
structural, we put the model first and make it explicit.
Results generalize better.
For job market: Makes you look smart
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Reduced-form Structural
Baker, Stein, Wurgler (2003, QJE) Warusawitharana and Whited (2015, RFS)
Approach Regress investment on a Estimate structural parameters by SMM.
proxy for misvaluation Q Use counterfactual analysis to measure
effects of misvaluation on policies
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Choose the approach that lets you answer your question most
easily and convincingly.
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Better models that can explain more phenomenon may not lend
themselves to closed-form solutions.
1 Ariel Pakes, Keynote address delivered at the inaugural International Industrial Organization
Setup
Let Let xi be an i.i.d. data vector, i = 1, . . . , n.
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Moment Matching
The first step is to estimate h (xi ) using the actual data.
For each of these data sets, estimate a simulated moment, h (yis (b)).
Note that you have to make the exact same calculations on the
simulated data as you do on the real data.
Moment Matching
Now lets figure out how to match the moments:
Define
n
" S
#
X X
1 1
gn (b) = n h (xi ) S h (yis (b)) .
i=1 s=1
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Weight Matrix
The nice part about this type of weight matrix is that you can
estimate it before you start minimizing the SMM objective
function.
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Inference
d
n b b N 0, avar(b)
in which
1
1 gn (b) gn (b)
avar(b) 1 + W .
S b b0
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Inference
nS
Q(b, n)
1+S
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Pseudo Code
function SMM (in double parameters[numberParameters],
out double objectiveFunctionValue)
read dataMoments[numberMoments]
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Identification
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Identification
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Identification
If the sensitivity is low, the derivative will be near zero, which will
produce a high variance for the structural estimates.
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Use Economics
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
More on identification
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Estimate the model, treating the fake data as if it were real data
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Use the same seed for the random-number generator each time
you simulate data off the model.
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Software
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
. . .emotionally robust
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Introduction
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Introduction
Why are these questions well suited to structural estimation?
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
2 If the next best CEO is as good as the current one, why bother?
4 CEO entrenchment
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Great paragraph:
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Model assumptions:
In each period t:
Board decides whether or not to fire CEO
CEO quits / retires with probability f ( )
Firm generates profitablity Yt :
(f irm)
c includes separation pay, executive search fees...
yt = yt1 + ( yt1 ) + t
= persistence parameter t N (0, 2 )
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
N 0 , 02
zt N , z2
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
" #
X
s
max Ut Et ut+s
{f iret+s }
s=0 s=0
ut = Bt Yt Bt 1 {f iret } c(pers)
| {z } | {z }
profits pers. turn. costs
Bt = firm assets
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Predictions summary
Board optimally fires CEO as soon as posterior mean skill drops
below endogenous threshold
Notice how the model gets at the questions via specific model
features. This is hard to do and exactly what you should do!
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
SMM Estimation
Data:
981 CEOs who left office between 1971-2006
Successions classified as either forced or voluntary
Profitability during each year CEO in office
SMM estimator:
n o
0 , 0 , z , , , c(f irm) /, c(pers)
S
!0 S
!
1 X
s 1 X
s
b arg min M c mb () W M c m
b ()
S s=1 S s=1
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Parameter estimates
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Empirical Simulated
% of CEOs fired per year 2.29 2.16
% successions forced 17.1 16.2
Median spell length (years):
Forced 4 4
Voluntary 7 7
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
Baseline Counter-factual
Personal turnover cost 4.6% 0.0%
% of CEOs fired per year 2 13
Mean profitability per year 15.5% 16.0%
Mean M/B 1.55 1.60
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation
What? Why? SMM Tips Taylor, 2010
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Toni M. Whited Overview of Structural Estimation