Title: Derivative-based optimization with a non-smooth simulated criterion
Authors: David Frazier - Monash University (Australia) [presenting]
Dan Zhu - Monash University (Australia)
Abstract: Indirect inference requires simulating realizations of endogenous variables from the model under study. When the endogenous variables are discontinuous functions of the model parameters, the resulting indirect inference criterion function is discontinuous and does not permit the use of derivative-based optimization routines. Using a specific class of measure changes, we propose a novel simulation algorithm that alleviates the underlying discontinuities inherent in the indirect inference criterion function, permitting the application of derivative-based optimization routines to estimate the unknown model parameters. Unlike competing approaches, this approach does not rely on kernel smoothing or bandwidth parameters. Several Monte Carlo examples that have featured in the literature on indirect inference with discontinuous outcomes illustrate the approach. These examples demonstrate that this new method gives superior performance over existing alternatives in terms of bias, variance and coverage.