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A Stopping Rule for the Computation of Generalized Method of Moments Estimators

Donald W. K. Andrews

Abstract

To obtain consistency and asymptotic normality, a generalized method of moments (GMM) estimator typically is defined to be an approximate global minimizer of a GMM criterion function. To compute such an estimator, however, can be problematic because of the difficulty of global optimization. In consequence, practitioners usually ignore the problem and take the GMM estimator to be the result of a local optimization algorithm. This yields an estimator that is not necessarily consistent and asymptotically normal. The use of a local optimization algorithm also can run into the problem of instability due to flats or ridges in the criterion function, which makes it difficult to know when to stop the algorithm. To alleviate these problems of global and local optimization, we propose a stopping-rule (SR) procedure for computing GMM estimators. The SR procedure eliminates the need for global search with high probability. And, it provides an explicit SR for problems of stability that may arise with local optimization problems.