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Conditional Inference for GMM Model Specification Test with Applications to Asset Pricing Models (with Winston Wei Dou and Zhipeng Liao)

Montreal Econometrics Seminar 2019-2020
joint with the departments of economics of the universities of Montréal, Québec à Montréal, Concordia and McGill and with CIRANO

room Leacock 429 (McGill University, 855 Sherbrooke Street West)

Organizers : Marine Carrasco (U. of Montreal) and Saraswata Chaudhuri (McGill U.)



Economic hypotheses, such as rational expectation, provide moment conditions that facilitate the generalized method of moments (GMM) estimation for economic models. To test these economic hypotheses, a J test is routinely reported. This paper shows that, for many economic applications, some additional information is available to improve the power of the test. However, such information has a low signal to noise ratio and a new inference method is needed for correct inference. By incorporating the additional information in a weakly identified baseline model and imposing the economic hypothesis in a full model, we provide a more powerful and robust GMM model specification test.

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