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Cross-section and GMM/SDF tests of linear factor models

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  • Mohammad Q.M. Momani

Abstract

This study follows the appropriate Cochrane (2005) framework for comparing the estimates’ standard errors, $$t$$t-statistics and $${\chi ^2}$$χ2 statistics that pricing errors are jointly zero of the beta and the Generalized Method of Moments/Stochastic Discount Factor (GMM/SDF) methods in testing linear factor models. I extend his work by using the Fama-French three-factor model. The study finds that the GMM/SDF estimators’ standard errors and $$t$$t-statistics behave very similarly to those obtained by the beta method, and the methods give almost exactly the same $${\chi ^2}$$χ2 statistics. Unlike Rubio and Lozano (2011) conclusion, I find that Cochrane (2005) results are extensible to the Fama-French three-factor model. The results are robust using an extended sample period that ends in February 2020.

Suggested Citation

  • Mohammad Q.M. Momani, 2021. "Cross-section and GMM/SDF tests of linear factor models," Applied Economics Letters, Taylor & Francis Journals, vol. 28(7), pages 590-593, April.
    • Handle: RePEc:taf:apeclt:v:28:y:2021:i:7:p:590-593
    DOI: 10.1080/13504851.2020.1764479
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