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Testing Parameters in GMM Without Assuming that They Are Identified

  • Frank Kleibergen

We propose a generalized method of moments (GMM) Lagrange multiplier statistic, i.e., the K statistic, that uses a Jacobian estimator based on the continuous updating estimator that is asymptotically uncorrelated with the sample average of the moments. Its asymptotic χ-super-2 distribution therefore holds under a wider set of circumstances, like weak instruments, than the standard full rank case for the expected Jacobian under which the asymptotic χ-super-2 distributions of the traditional statistics are valid. The behavior of the K statistic can be spurious around inflection points and maxima of the objective function. This inadequacy is overcome by combining the K statistic with a statistic that tests the validity of the moment equations and by an extension of Moreira's (2003) conditional likelihood ratio statistic toward GMM. We conduct a power comparison to test for the risk aversion parameter in a stochastic discount factor model and construct its confidence set for observed consumption growth and asset return series. Copyright The Econometric Society 2005.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 73 (2005)
Issue (Month): 4 (07)
Pages: 1103-1123

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Handle: RePEc:ecm:emetrp:v:73:y:2005:i:4:p:1103-1123
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