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A reconsideration of the properties of the generalized method moments in asset pricing models

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  • Christopher J. Neely

Abstract

This paper tests the small sample properties of Hansen's (1982) Generalized Method of Moments (GMM) on simulated data from a consumption based asset pricing model. In finite samples the estimates of the coefficient of relative risk aversion and the discount parameter are strongly biased due to the unusual shape of the GMM criterion function for the model and the GMM test statistics perform poorly. In fact, the finite sample properties of the test statistics suggest the rejection results achieved by applying GMM to representative agent asset pricing models with real data (Hansen and Singleton 1982) must be viewed with some circumspection. Revised Version - 1995-018

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1994-010.

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Date of creation: 1994
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Handle: RePEc:fip:fedlwp:1994-010

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Keywords: Prices ; Statistics;

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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  3. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  4. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1988. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc.
  5. Kocherlakota, Narayana R., 1990. "On tests of representative consumer asset pricing models," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 285-304, October.
  6. Tauchen, George, 1986. "Statistical Properties of Generalized Method-of-Moments Estimators of Structural Parameters Obtained from Financial Market Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(4), pages 397-416, October.
  7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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Cited by:
  1. James H. Stock & Jonathan Wright, 1996. "Asymptotics for GMM Estimators with Weak Instruments," NBER Technical Working Papers 0198, National Bureau of Economic Research, Inc.

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