Smoothed GMM for quantile models

TL;DR

This paper introduces new feasible estimators for conditional quantile models using smoothed moments, with theoretical guarantees and an empirical application to consumption Euler equations across countries.

Contribution

It develops a novel theory for feasible estimators under weaker assumptions, including for nonlinear and weakly dependent data, and applies it to quantile utility maximization.

Findings

Estimators are consistent and asymptotically normal under general conditions.

Quantile estimates of discount factors are economically reasonable across countries.

Method outperforms traditional two-stage least squares in certain quantile ranges.

Abstract

This paper develops theory for feasible estimators of finite-dimensional parameters identified by general conditional quantile restrictions, under much weaker assumptions than previously seen in the literature. This includes instrumental variables nonlinear quantile regression as a special case. More specifically, we consider a set of unconditional moments implied by the conditional quantile restrictions, providing conditions for local identification. Since estimators based on the sample moments are generally impossible to compute numerically in practice, we study feasible estimators based on smoothed sample moments. We propose a method of moments estimator for exactly identified models, as well as a generalized method of moments estimator for over-identified models. We establish consistency and asymptotic normality of both estimators under general conditions that allow for weakly dependent data and nonlinear structural models. Simulations illustrate the finite-sample properties of the methods. Our in-depth empirical application concerns the consumption Euler equation derived from quantile utility maximization. Advantages of the quantile Euler equation include robustness to fat tails, decoupling of risk attitude from the elasticity of intertemporal substitution, and log-linearization without any approximation error. For the four countries we examine, the quantile estimates of discount factor and elasticity of intertemporal substitution are economically reasonable for a range of quantiles above the median, even when two-stage least squares estimates are not reasonable.