Optimal Instrumental Variables Generators Based on Improved Hausman Regression, with an Application to Hedge Funds Returns

François-Éric Racicot () and Raymond Théoret ()
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Raymond Théoret: Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle

RePAd Working Paper Series from Département des sciences administratives, UQO

Abstract: This paper proposes new Hausman-based estimators lying on cumulants optimal instruments. Using these new generated strong instruments in a GMM setting, we obtain new GMM estimators which we call GMM-C and its homologue, the GMM-hm. This procedure improves the method of moments for identifying the parameters of a model. Also, our study gives way to a new indicator signalling the presence of specification errors in financial models. We apply our battery of tests and estimators to a sample of 22 HFR hedge fund indices observed monthly over the period 1990-2005. Our tests reveal that specification errors corrupt parameters estimation of financial models of returns. Therefore, it is not surprising that the ranking of hedge funds is very sensitive to the choice of estimators. Our new indicator of specification errors reveals itself very powerful to detect those errors.

Keywords: Asset Pricing Models; specification errors; Hausman test; GMM; optimal instruments. (search for similar items in EconPapers)
JEL-codes: C13 C19 C49 G12 G31 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2008-01-06
New Economics Papers: this item is included in nep-bec and nep-ecm
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Citations: View citations in EconPapers (2)

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