Finite Sample Properties of Tests of the Epstein-Zin Asset Pricing Model
Journal of Econometrics
Posted: 15 Feb 1999
I investigate the power of Hansen and Singleton (1982)-type GMM tests to differentiate asset pricing restrictions based on Epstein and Zin (1989) preferences from restrictions formed assuming time and state separable expected utility (TSEU). I find the tests often have little size-adjusted power to reject TSEU, even when I force the difference between the relative risk aversion and inverse intertemporal substitution parameter to be large. Wald test appears to have greater power than likelihood ratio-type tests and use of the Hansen, Heaton and Yaron (1996) continuous-updating estimator improves the power of the tests.
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JEL Classification: C52, G12
Suggested Citation: Suggested Citation