MCMC perspectives on simulated likelihood estimation

Abstract

A major stumbling block in multivariate discrete data analysis is the problem of evaluating the outcome probabilities that enter the likelihood function. Calculation of these probabilities involves high-dimensional integration, making simulation methods indispensable in both Bayesian and frequentist estimation and model choice. We review several existing probability estimators and then show that a broader perspective on the simulation problem can be afforded by interpreting the outcome probabilities through Bayes’ theorem, leading to the recognition that estimation can alternatively be handled by methods for marginal likelihood computation based on the output of Markov chain Monte Carlo (MCMC) algorithms. These techniques offer stand-alone approaches to simulated likelihood estimation but can also be integrated with traditional estimators. Building on both branches in the literature, we develop new methods for estimating response probabilities and propose an adaptive sampler for producing high-quality draws from multivariate truncated normal distributions. A simulation study illustrates the practical benefits and costs associated with each approach. The methods are employed to estimate the likelihood function of a correlated random effects panel data model of women's labor force participation.

Citation

Jeliazkov, I. and Hee Lee, E. (2010), "MCMC perspectives on simulated likelihood estimation", Greene, W. and Carter Hill, R. (Ed.) Maximum Simulated Likelihood Methods and Applications (Advances in Econometrics, Vol. 26), Emerald Group Publishing Limited, Leeds, pp. 3-39. https://doi.org/10.1108/S0731-9053(2010)0000026005