Give Me Strong Moments and Time: Combining GMM and SMM to Estimate the Long-Run Risk Asset Pricing Model

CFS Working Paper No. 479

64 Pages Posted: 11 Oct 2014 Last revised: 31 Dec 2015

See all articles by Joachim Grammig

Joachim Grammig

University of Tuebingen

Eva-Maria Küchlin

Eberhard Karls Universitaet Tuebingen

Multiple version iconThere are 2 versions of this paper

Date Written: December 30, 2015

Abstract

The long-run consumption risk (LRR) model is a popular approach to resolve various asset pricing puzzles, but its econometric analysis is complicated and often relies on simulation-based methods. This study addresses inherent identification problems and offers a solution by proposing a two-step GMM/SMM estimation strategy that exploits the recursive LRR model structure. We motivate macroeconomic and financial moment matches and show possibilities and limits for a successful econometric analysis of the LRR model. A simulation study and an empirical application reveal the estimation quality, in terms of feasibility and precision, that reasonably can be expected.

Keywords: asset pricing, long-run risk, simulated method of moments

JEL Classification: C58, G10, G12

Suggested Citation

Grammig, Joachim and Küchlin, Eva-Maria, Give Me Strong Moments and Time: Combining GMM and SMM to Estimate the Long-Run Risk Asset Pricing Model (December 30, 2015). CFS Working Paper No. 479, Available at SSRN: https://ssrn.com/abstract=2508125 or http://dx.doi.org/10.2139/ssrn.2508125

Joachim Grammig (Contact Author)

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

Eva-Maria Küchlin

Eberhard Karls Universitaet Tuebingen ( email )

Mohlstrasse 36
Tuebingen, 72074
Germany

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