GMM Tests of Stochastic Discount Factor Models with Useless Factors

@inproceedings{Rotman1999GMMTO,
  title={GMM Tests of Stochastic Discount Factor Models with Useless Factors},
  author={Joseph L. Rotman},
  year={1999}
}
  • Joseph L. Rotman
  • Published 1999
This paper studies generalized method of moments tests for the stochastic discount factor representation of asset pricing models when one of the proposed factors is in fact useless, defined as being independent of the asset returns. Analytic results on asymptotic distributions and simulation results on finite sample distributions both show that (i) the Wald test tends to overreject the hypothesis of a zero factor premium for a useless factor when the model is misspecified, (ii) with the… CONTINUE READING
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