Robust Estimation of Regression Models with Potentially Endogenous Outliers via a Modern Optimization Lens
Abstract
This paper addresses the robust estimation of linear regression models in the presence of potentially endogenous outliers. Through Monte Carlo simulations, we demonstrate that existing -regularized estimation methods, including the Huber estimator and the least absolute deviation (LAD) estimator, exhibit significant bias when outliers are endogenous. Motivated by this finding, we investigate -regularized estimation methods. We propose systematic heuristic algorithms, notably an iterative hard-thresholding algorithm and a local combinatorial search refinement, to solve the combinatorial optimization problem of the -regularized estimation efficiently. Our Monte Carlo simulations yield two key results: (i) The local combinatorial search algorithm substantially improves solution quality compared to the initial projection-based hard-thresholding algorithm while offering greater computational efficiency than directly solving the mixed integer optimization problem. (ii) The -regularized estimator demonstrates superior performance in terms of bias reduction, estimation accuracy, and out-of-sample prediction errors compared to -regularized alternatives. We illustrate the practical value of our method through an empirical application to stock return forecasting.
Keywords
Cite
@article{arxiv.2408.03930,
title = {Robust Estimation of Regression Models with Potentially Endogenous Outliers via a Modern Optimization Lens},
author = {Zhan Gao and Hyungsik Roger Moon},
journal= {arXiv preprint arXiv:2408.03930},
year = {2024}
}