rivDP {bayesm} R Documentation

## Linear "IV" Model with DP Process Prior for Errors

### Description

`rivDP` is a Gibbs Sampler for a linear structural equation with an arbitrary number of instruments. `rivDP` uses a mixture-of-normals for the structural and reduced form equations implemented with a Dirichlet Process prior.

### Usage

`rivDP(Data, Prior, Mcmc)`

### Arguments

 `Data ` list(y, x, w, z) `Prior` list(md, Ad, mbg, Abg, lambda, Prioralpha, lambda_hyper) `Mcmc ` list(R, keep, nprint, maxuniq, SCALE, gridsize)

### Details

#### Model and Priors

x = z'δ + e1
y = β*x + w'γ + e2
e1,e2 ~ N(θ_{i}) where θ_{i} represents μ_{i}, Σ_{i}

Note: Error terms have non-zero means. DO NOT include intercepts in the z or w matrices. This is different from `rivGibbs` which requires intercepts to be included explicitly.

vec(β, γ) ~ N(mbg, Abg^{-1})
θ_{i} ~ G
G ~ DP(alpha, G_0)

alpha ~ (1-(alpha-alpha_{min})/(alpha_{max}-alpha{min}))^{power}
where alpha_{min} and alpha_{max} are set using the arguments in the reference below. It is highly recommended that you use the default values for the hyperparameters of the prior on alpha.

G_0 is the natural conjugate prior for (μ,Σ): Σ ~ IW(nu, vI) and μ|Σ ~ N(0, Σ(x) a^{-1})
These parameters are collected together in the list λ. It is highly recommended that you use the default settings for these hyper-parameters.

λ(a, nu, v):
a ~ uniform[alim, alimb]
nu ~ dim(data)-1 + exp(z)
z ~ uniform[dim(data)-1+nulim, nulim]
v ~ uniform[vlim, vlim]

#### Argument Details

`Data = list(y, x, w, z)`

 `y: ` n x 1 vector of obs on LHS variable in structural equation `x: ` n x 1 vector of obs on "endogenous" variable in structural equation `w: ` n x j matrix of obs on "exogenous" variables in the structural equation `z: ` n x p matrix of obs on instruments

`Prior = list(md, Ad, mbg, Abg, lambda, Prioralpha, lambda_hyper)` [optional]

 `md: ` p-length prior mean of delta (def: 0) `Ad: ` p x p PDS prior precision matrix for prior on delta (def: 0.01*I) `mbg: ` (j+1)-length prior mean vector for prior on beta,gamma (def: 0) `Abg: ` (j+1)x(j+1) PDS prior precision matrix for prior on beta,gamma (def: 0.01*I) `Prioralpha:` `list(Istarmin, Istarmax, power)` `\$Istarmin: ` is expected number of components at lower bound of support of alpha (def: 1) `\$Istarmax: ` is expected number of components at upper bound of support of alpha (def: `floor(0.1*length(y))`) `\$power: ` is the power parameter for alpha prior (def: 0.8) `lambda_hyper:` `list(alim, nulim, vlim)` `\$alim: ` defines support of a distribution (def: `c(0.01, 10)`) `\$nulim: ` defines support of nu distribution (def: `c(0.01, 3)`) `\$vlim: ` defines support of v distribution (def: `c(0.1, 4)`)

`Mcmc = list(R, keep, nprint, maxuniq, SCALE, gridsize)` [only `R` required]

 `R: ` number of MCMC draws `keep: ` MCMC thinning parameter: keep every keepth draw (def: 1) `nprint: ` print the estimated time remaining for every nprint'th draw (def: 100, set to 0 for no print) `maxuniq: ` storage constraint on the number of unique components (def: 200) `SCALE: ` scale data (def: `TRUE`) `gridsize: ` gridsize parameter for alpha draws (def: 20)

#### `nmix` Details

`nmix` is a list with 3 components. Several functions in the `bayesm` package that involve a Dirichlet Process or mixture-of-normals return `nmix`. Across these functions, a common structure is used for `nmix` in order to utilize generic summary and plotting functions.

 `probdraw:` ncomp x R/keep matrix that reports the probability that each draw came from a particular component (here, a one-column matrix of 1s) `zdraw: ` R/keep x nobs matrix that indicates which component each draw is assigned to (here, null) `compdraw:` A list of R/keep lists of ncomp lists. Each of the inner-most lists has 2 elemens: a vector of draws for `mu` and a matrix of draws for the Cholesky root of `Sigma`.

### Value

A list containing:

 `deltadraw ` R/keep x p array of delta draws `betadraw ` R/keep x 1 vector of beta draws `alphadraw ` R/keep x 1 vector of draws of Dirichlet Process tightness parameter `Istardraw ` R/keep x 1 vector of draws of the number of unique normal components `gammadraw ` R/keep x j array of gamma draws `nmix ` a list containing: `probdraw`, `zdraw`, `compdraw` (see “`nmix` Details” section)

### Author(s)

Peter Rossi, Anderson School, UCLA, perossichi@gmail.com.

### References

For further discussion, see "A Semi-Parametric Bayesian Approach to the Instrumental Variable Problem," by Conley, Hansen, McCulloch and Rossi, Journal of Econometrics (2008).

See also, Chapter 4, Bayesian Non- and Semi-parametric Methods and Applications by Peter Rossi.

`rivGibbs`

### Examples

```if(nchar(Sys.getenv("LONG_TEST")) != 0) {R=2000} else {R=10}
set.seed(66)

## simulate scaled log-normal errors and run
k = 10
delta = 1.5
Sigma = matrix(c(1, 0.6, 0.6, 1), ncol=2)
N = 1000
tbeta = 4
scalefactor = 0.6
root = chol(scalefactor*Sigma)
mu = c(1,1)

## compute interquartile ranges
ninterq = qnorm(0.75) - qnorm(0.25)
error = matrix(rnorm(100000*2), ncol=2)%*%root
error = t(t(error)+mu)
Err = t(t(exp(error))-exp(mu+0.5*scalefactor*diag(Sigma)))
lnNinterq = quantile(Err[,1], prob=0.75) - quantile(Err[,1], prob=0.25)

## simulate data
error = matrix(rnorm(N*2), ncol=2)%*%root
error = t(t(error)+mu)
Err = t(t(exp(error))-exp(mu+0.5*scalefactor*diag(Sigma)))

## scale appropriately
Err[,1] = Err[,1]*ninterq/lnNinterq
Err[,2] = Err[,2]*ninterq/lnNinterq
z = matrix(runif(k*N), ncol=k)
x = z%*%(delta*c(rep(1,k))) + Err[,1]
y = x*tbeta + Err[,2]

## specify data input and mcmc parameters
Data = list();
Data\$z = z
Data\$x = x
Data\$y = y

Mcmc = list()
Mcmc\$maxuniq = 100
Mcmc\$R = R
end = Mcmc\$R

out = rivDP(Data=Data, Mcmc=Mcmc)

cat("Summary of Beta draws", fill=TRUE)