Analytical GMM Tests: Asset Pricing with Time-Varying Risk Premiums
REVIEW OF FINANCIAL STUDIES, Vol 7 No 4, 1994
Posted: 24 Apr 1998
We propose alternative GMM tests that are analytically solvable in many econometric models, yielding in particular analytical GMM tests for asset pricing models with time- varying risk premiums. We also provide simulation evidence showing that the proposed tests have good finite sample properties and that their asymptotic distribution is reliable for the sample size commonly used. We apply our tests to study the number of latent factors in the predictable variations of the returns on portfolios grouped by industries. Using data from October 1941 to September 1986 and two sets of instrumental variables, we find that the tests reject a one-factor model but not a two-factor model.
JEL Classification: G12
Suggested Citation: Suggested Citation