Testing asset pricing models with Euler equations: it's worse than you think

Christopher Neely

No 1995-018, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper reexamines the small sample properties of Hansen's (1982) Generalized Method of Moments (GMM) and Hansen and Jagannathan's (1989) estimation-free tests on simulated data from a more plausible consumption based asset pricing model. Previous studies are incomplete and misleading. A continuous distribution of consumption growth produces a near nonidentification in the GMM criterion function, severe bias in coefficient estimates, misleading parameter confidence intervals even for very large samples and far worse overrejection problem in GMM tests of restriction than previously thought. Further, estimation-free methods advocated by Kocherlakota (1990) may also have very poor finite sample properties.

Keywords: Prices; Statistics (search for similar items in EconPapers)
Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:1995-018

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DOI: 10.20955/wp.1995.018

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