Asymptotic Variance Approximations for Invariant Estimators in Uncertain Asset-Pricing Models

41 Pages Posted: 2 Nov 2015 Last revised: 30 Aug 2017

See all articles by Nikolay Gospodinov

Nikolay Gospodinov

Federal Reserve Bank of Atlanta

Raymond Kan

University of Toronto - Rotman School of Management

Cesare Robotti

Imperial College Business School

Date Written: 2015-10-01

Abstract

This paper derives explicit expressions for the asymptotic variances of the maximum likelihood and continuously updated GMM estimators under potentially misspecified models. The proposed misspecification-robust variance estimators allow the researcher to conduct valid inference on the model parameters even when the model is rejected by the data. Although the results for the maximum likelihood estimator are only applicable to linear asset-pricing models, the asymptotic distribution of the continuously updated GMM estimator is derived for general, possibly nonlinear, models. The large corrections in the asymptotic variances, which arise from explicitly incorporating model misspecification in the analysis, are illustrated using simulations and an empirical application.

Keywords: asset pricing, model misspecification, continuously updated GMM, maximum likelihood, asymptotic approximation, misspecification-robust tests

JEL Classification: C12, C13, G12

Suggested Citation

Gospodinov, Nikolay and Kan, Raymond and Robotti, Cesare, Asymptotic Variance Approximations for Invariant Estimators in Uncertain Asset-Pricing Models (2015-10-01). FRB Atlanta Working Paper No. 2015-9. Available at SSRN: https://ssrn.com/abstract=2685056

Nikolay Gospodinov (Contact Author)

Federal Reserve Bank of Atlanta ( email )

Atlanta, GA 30309
United States

HOME PAGE: https://www.frbatlanta.org/research/economists/gospodinov-nikolay.aspx?panel=1

Raymond Kan

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-4291 (Phone)
416-971-3048 (Fax)

Cesare Robotti

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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