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

Mohammad Q.M. Momani

Applied Economics Letters, 2021, vol. 28, issue 7, 590-593

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.

Date: 2021
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DOI: 10.1080/13504851.2020.1764479

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