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Consistent Inference in Models Defined by COnditional Moment Restrictions: an Alternative to GMM

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Author Info

  • Manuel Dominguez

    ()
    (Facultad de Ciencias Economicas y EMpresariales, Universidad COmplutense de Madrid)

  • Ignacio Lobato

    ()
    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

Abstract

This article introduces a unified methodology for estimating and testing nonlinear econometric models defined by conditional moment restrictions. These models are very common in econometrics, such as nonlinear rational expectation models. The current approach for inference in these models is the generalized method of moments (GMM) methodology, as proposed by Hansen and Singleton (1982). Although GMM provides a unified methodology for statistical inference that is simple to implement, it may yield inconsistent statistical procedures because it just employs a finite number of moments. This is a very important theoretical and applied problem, as illustrated by a simplified consumption-based asset pricing model. Contrary to GMM, the methodology proposed in this article delivers consistent statistical procedures because it employs an infinite number of moments that characterizes the conditional moment. In addition, the proposed methodology is widely applicable for general time series data and easy to implement. In particular, the proposed specification test relies on a novel and very simple wild bootstrap procedure.

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Bibliographic Info

Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 1005.

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Length: 42 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:cie:wpaper:1005

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Related research

Keywords: Generalized Method of Moments; Identification; Unconditional Moments; Consistency; Minimum Distance; Marked Empirical Process;

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  1. Juan Carlos Escanciano, 2005. "Goodness-of-fit Tests for Linear and Non-linear Time Series Models," Faculty Working Papers 02/05, School of Economics and Business Administration, University of Navarra.
  2. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 937-69, July.
  3. Horowitz, J.L., 1992. "Testing a Parametric Model Against a Semiparametric Alternative," Papers, Tilburg - Center for Economic Research 9219, Tilburg - Center for Economic Research.
  4. James H. Stock & Jonathan Wright, 2000. "GMM with Weak Identification," Econometrica, Econometric Society, Econometric Society, vol. 68(5), pages 1055-1096, September.
  5. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(3), pages 519-43, June.
  6. Wooldridge, Jeffrey M., 1990. "A Unified Approach to Robust, Regression-Based Specification Tests," Econometric Theory, Cambridge University Press, vol. 6(01), pages 17-43, March.
  7. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
  8. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  9. Gregory, Allan W. & Lamarche, Jean-Francois & Smith, Gregor W., 2002. "Information-theoretic estimation of preference parameters: macroeconomic applications and simulation evidence," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 213-233, March.
  10. Pascal Lavergne & Valentin Patilea, 2008. "Smooth Minimum Distance Estimation and Testing in Conditional Moment Restrictions Models: Uniform in Bandwidth Theory," Discussion Papers dp08-08, Department of Economics, Simon Fraser University.
  11. JAMES G. MacKINNON, 2006. "Bootstrap Methods in Econometrics," The Economic Record, The Economic Society of Australia, vol. 82(s1), pages S2-S18, 09.
  12. Tauchen, George, 1985. "Diagnostic testing and evaluation of maximum likelihood models," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 415-443.
  13. Stinchcombe, Maxwell B. & White, Halbert, 1998. "Consistent Specification Testing With Nuisance Parameters Present Only Under The Alternative," Econometric Theory, Cambridge University Press, vol. 14(03), pages 295-325, June.
  14. Bierens, Herman J., 1982. "Consistent model specification tests," Journal of Econometrics, Elsevier, vol. 20(1), pages 105-134, October.
  15. Carrasco, Marine & Florens, Jean-Pierre, 2000. "Generalization Of Gmm To A Continuum Of Moment Conditions," Econometric Theory, Cambridge University Press, vol. 16(06), pages 797-834, December.
  16. Youngki Shin, 2008. "Semiparametric estimation of the Box--Cox transformation model," Econometrics Journal, Royal Economic Society, vol. 11(3), pages 517-537, November.
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