General matching quantiles M-estimation

Abstract

Matching quantiles estimation (MQE) is a useful technique that allows one to find a linear combination of a set of random variables that matches the distribution of a target random variable. Since it is based on ordinary least-squares (OLS), it may be sensitive to outlier observations of the target random variable. A general matching quantiles M-estimation (MQME) method is thus proposed, which is resistant to outlier observations of the target random variable. Given that in most applications, the number of variables p may be large, a ‘sparse’ representation is highly desirable. The MQME is combined with the adaptive Lasso penalty so it can select informative variables. An iterative algorithm based on M-estimation is developed to compute MQME. The proposed matching quantiles M-estimate is consistent, just like the MQE. Extensive simulations are provided, in which efficient finite-sample performance of the new method is demonstrated. In addition, an illustrative real case study is presented.