IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v7y1994i4p687-709.html
   My bibliography  Save this article

Analytical GMM Tests: Asset Pricing with Time-Varying Risk Premiums

Author

Listed:
  • Zhou, Guofu

Abstract

We propose alternative generalized method of moments (GMM) tests that are analytically solvable in many econometric models, yielding in particular analytical GMM tests for asset pricing models with time-varying risk premiums. We also provide simulation evidence showing that the proposed tests have good finite sample properties and that their asymptotic distribution is reliable for the sample size commonly used. We apply our tests to study the number of latent factors in the predictable variations of the returns on portfolios grouped by industries. Using data from October 1941 to September 1986 and two sets of instrumental variables, we find that the tests reject a one-factor model but not a two-factor one. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Zhou, Guofu, 1994. "Analytical GMM Tests: Asset Pricing with Time-Varying Risk Premiums," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 687-709.
  • Handle: RePEc:oup:rfinst:v:7:y:1994:i:4:p:687-709
    as

    Download full text from publisher

    File URL: http://www.jstor.org/fcgi-bin/jstor/listjournal.fcg/08939454
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lamoureux, Christopher G & Lastrapes, William D, 1990. " Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects," Journal of Finance, American Finance Association, vol. 45(1), pages 221-229, March.
    2. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, Oxford University Press, pages 905-939.
    3. Lakonishok, Josef & Smidt, Seymour, 1986. " Volume for Winners and Losers: Taxation and Other Motives for Stock Trading," Journal of Finance, American Finance Association, vol. 41(4), pages 951-974, September.
    4. Lakonishok, Josef & Vermaelen, Theo, 1986. "Tax-induced trading around ex-dividend days," Journal of Financial Economics, Elsevier, vol. 16(3), pages 287-319, July.
    5. repec:bla:joares:v:6:y:1968:i::p:67-92 is not listed on IDEAS
    6. Karpoff, Jonathan M. & Walkling, Ralph A., 1990. "Dividend capture in NASDAQ stocks," Journal of Financial Economics, Elsevier, vol. 28(1-2), pages 39-65.
    7. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    8. Epps, Thomas W & Epps, Mary Lee, 1976. "The Stochastic Dependence of Security Price Changes and Transaction Volumes: Implications for the Mixture-of-Distributions Hypothesis," Econometrica, Econometric Society, vol. 44(2), pages 305-321, March.
    9. Chamberlain, Gary & Rothschild, Michael, 1983. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Econometrica, Econometric Society, vol. 51(5), pages 1281-1304, September.
    10. He, Hua & Wang, Jiang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 919-972.
    11. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
    12. Brown, Keith C. & Harlow, W. V. & Tinic, Seha M., 1993. "The Risk and Required Return of Common Stock following Major Price Innovations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 101-116, March.
    13. Lamoureux, Christopher G & Lastrapes, William D, 1994. "Endogenous Trading Volume and Momentum in Stock-Return Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 253-260, April.
    14. Chamberlain, Gary, 1983. "Funds, Factors, and Diversification in Arbitrage Pricing Models," Econometrica, Econometric Society, vol. 51(5), pages 1305-1323, September.
    15. Dhillon, Upinder & Johnson, Herb, 1991. "Changes in the Standard and Poor's 500 List," The Journal of Business, University of Chicago Press, vol. 64(1), pages 75-85, January.
    16. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    17. Atkins, Allen B & Dyl, Edward A, 1997. "Market Structure and Reported Trading Volume: NASDAQ versus the NYSE," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(3), pages 291-304, Fall.
    18. Karpoff, Jonathan M. & Walkling, Ralph A., 1988. "Short-term trading around ex-dividend days : Additional evidence," Journal of Financial Economics, Elsevier, vol. 21(2), pages 291-298, September.
    19. Dumas, Bernard, 1989. "Two-Person Dynamic Equilibrium in the Capital Market," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 157-188.
    20. James, Christopher M & Edmister, Robert O, 1983. " The Relation between Common Stock Returns Trading Activity and Market Value," Journal of Finance, American Finance Association, vol. 38(4), pages 1075-1086, September.
    21. Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June.
    22. Harris, Lawrence E & Gurel, Eitan, 1986. " Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-829, September.
    23. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    24. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-384, March.
    25. Jain, Prem C. & Joh, Gun-Ho, 1988. "The Dependence between Hourly Prices and Trading Volume," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(03), pages 269-283, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2015. "Regression-based estimation of dynamic asset pricing models," Journal of Financial Economics, Elsevier, vol. 118(2), pages 211-244.
    2. Zhou, Guofu, 1999. "Security factors as linear combinations of economic variables," Journal of Financial Markets, Elsevier, vol. 2(4), pages 403-432, November.
    3. Cakici, Nusret & Fabozzi, Frank J. & Tan, Sinan, 2013. "Size, value, and momentum in emerging market stock returns," Emerging Markets Review, Elsevier, vol. 16(C), pages 46-65.
    4. Smith, Daniel R., 2007. "Conditional coskewness and asset pricing," Journal of Empirical Finance, Elsevier, pages 91-119.
    5. Campbell R. Harvey & Bruno Solnik & Guofu Zhou, 2002. "What Determines Expected International Asset Returns?," Annals of Economics and Finance, Society for AEF, pages 249-298.
    6. Nawalkha, Sanjay K., 1997. "A multibeta representation theorem for linear asset pricing theories," Journal of Financial Economics, Elsevier, vol. 46(3), pages 357-381, December.
    7. Ahn, Seung C. & Lee, Young H. & Schmidt, Peter, 2013. "Panel data models with multiple time-varying individual effects," Journal of Econometrics, Elsevier, vol. 174(1), pages 1-14.
    8. Campbell R. Harvey & Bruno Solnik & Guofu Zhou, 2002. "What Determines Expected International Asset Returns?," Annals of Economics and Finance, Society for AEF, pages 249-298.
    9. Raymond Kan & Guofu Zhou, 1999. "A Critique of the Stochastic Discount Factor Methodology," Journal of Finance, American Finance Association, vol. 54(4), pages 1221-1248, August.
    10. Ahn, Seung C. & Gadarowski, Christopher, 2004. "Small sample properties of the GMM specification test based on the Hansen-Jagannathan distance," Journal of Empirical Finance, Elsevier, pages 109-132.
    11. Mika Vaihekoski, 1998. "Short-term returns and the predictability of Finnish stock returns," Finnish Economic Papers, Finnish Economic Association, vol. 11(1), pages 19-36, Spring.
    12. Klein, Rudolf F. & Chow, Victor K., 2013. "Orthogonalized factors and systematic risk decomposition," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 175-187.
    13. Mercenier, J. & Yeldan, E., 1996. "How Prescribed Policy Can Mislead when Data Are Defective: a Follow-Up to Srinivasan (1994) Using General Equilibrium," Cahiers de recherche 9606, Universite de Montreal, Departement de sciences economiques.
    14. Velu, Raja & Zhou, Guofu, 1999. "Testing multi-beta asset pricing models," Journal of Empirical Finance, Elsevier, pages 219-241.
    15. Shanken, Jay & Zhou, Guofu, 2007. "Estimating and testing beta pricing models: Alternative methods and their performance in simulations," Journal of Financial Economics, Elsevier, vol. 84(1), pages 40-86, April.
    16. Quintos, Carmela E., 1998. "Analysis of cointegration vectors using the GMM approach," Journal of Econometrics, Elsevier, vol. 85(1), pages 155-188, July.
    17. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
    18. Huang, Roger D. & Lin, Charles S. Y., 1996. "An analysis of nonlinearities in term premiums and forward rates," Journal of Empirical Finance, Elsevier, pages 347-368.
    19. Kallberg, Jarl & Pasquariello, Paolo, 2008. "Time-series and cross-sectional excess comovement in stock indexes," Journal of Empirical Finance, Elsevier, pages 481-502.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:7:y:1994:i:4:p:687-709. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sfsssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.