Moment set selection for the SMM using simple machine learning

Abstract

This paper addresses the moment selection issue of the simulated method of moments, an estimation technique commonly applied to intractable agent-based models. We develop a simple machine learning extension reducing arbitrariness and automating the moment choice. Two algorithms are proposed: backward stepwise moment elimination and forward stepwise moment selection. The methodology is tested using simulations on a Markov-switching multifractal framework and two popular financial agent-based models with increasing complexity. We find that both algorithms can identify multiple moment sets that outperform all benchmark sets. Moreover, we achieve considerable in-sample estimation precision gains of up to 66 percent for agent-based models. Finally, an out-of-sample empirical exercise with S&P 500 data strongly supports the practical applicability of our methodology as the estimated models pass the validity test of overidentifying restrictions.