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A Tutorial on the Generalized Method of Moments (GMM) in Finance

Author

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  • Alan de Genaro
  • Paula Astorino

Abstract

Context: empirical problems in which the researcher is faced with a model that is partially specified. In these cases, the GMM method is the natural alternative for estimating the parameters of interest. Objective: the goal of this paper is to offer a tutorial that allows the researcher to understand both the theory and empirical aspects of the GMM method. Methods: we discuss the GMM concepts, forms of estimation, and limitations associated with the method. As a way of illustrating the method, we use two applications in the area of empirical finance. The first application is the estimation of the parameters of a consumption-based asset pricing models; the second is the estimation of the parameters of the evolution of the interest rate in continuous time. The data and codes in R are provided as online appendices. Conclusion: the GMM method can be used in problems where other methods such as maximum likelihood are not feasible, or even when the researcher wants to estimate a model partially specified.

Suggested Citation

  • Alan de Genaro & Paula Astorino, 2022. "A Tutorial on the Generalized Method of Moments (GMM) in Finance," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(sup2022), pages 210287-2102.
    • Handle: RePEc:abg:anprac:v:26:y:2022:i:sup2022:1527
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    References listed on IDEAS

    as
    1. Cochrane, John H, 1996. "A Cross-Sectional Test of an Investment-Based Asset Pricing Model," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 572-621, June.
    2. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, vol. 61(4), pages 929-952, July.
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