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59
A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments
 Journal of Business & Economic Statistics
, 2002
"... Weak instruments arise when the instruments in linear instrumental variables (IV) regression are weakly correlated with the included endogenous variables. In generalized method of moments (GMM), more generally, weak instruments correspond to weak identification of some or all of the unknown paramete ..."
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Cited by 181 (5 self)
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Weak instruments arise when the instruments in linear instrumental variables (IV) regression are weakly correlated with the included endogenous variables. In generalized method of moments (GMM), more generally, weak instruments correspond to weak identification of some or all of the unknown parameters. Weak identification leads to GMM statistics with nonnormal distributions, even in large samples, so that conventional IV or GMM inferences are misleading. Fortunately, various procedures are now available for detecting and handling weak instruments in the linear IV model and, to a lesser degree, in nonlinear GMM. KEY WORDS:
Resurrecting the (C)CAPM: A CrossSectional Test When Risk Premia Are TimeVarying
 Journal of Political Economy
, 2001
"... This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditio ..."
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Cited by 139 (5 self)
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This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditional models perform far better than unconditional specifications and about as well as the FamaFrench threefactor model on portfolios sorted by size and booktomarket characteristics. The conditional consumption CAPM can account for the difference in returns between lowbooktomarket and highbooktomarket portfolios and exhibits little evidence of residual size or booktomarket effects. We are grateful to Eugene Fama and Kenneth French for graciously providing the
Nonlinear Pricing Kernels, Kurtosis Preference, and the CrossSection of Assets Returns
 Journal of Finance
, 2002
"... This paper investigates nonlinear pricing kernels in which the risk factor is endogenously determined and preferences restrict the definition of the pricing kernel. These kernels potentially generate the empirical performance of nonlinear and multifactor models, while maintaining empirical power and ..."
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Cited by 82 (2 self)
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This paper investigates nonlinear pricing kernels in which the risk factor is endogenously determined and preferences restrict the definition of the pricing kernel. These kernels potentially generate the empirical performance of nonlinear and multifactor models, while maintaining empirical power and avoiding ad hoc specifications of factors or functional form. Our test results indicate that preferencerestricted nonlinear pricing kernels are both admissible for the cross section of returns and are able to significantly improve upon linear single and multifactor kernels. Further, the nonlinearities in the pricing kernel drive out the importance of the factors in the linear multifactor model. A PRINCIPAL IMPLICATION OF THE Capital Asset Pricing Model ~CAPM! is that the pricing kernel is linear in a single factor, the portfolio of aggregate wealth. Numerous studies over the past two decades have documented violations of this restriction. 1 In response, researchers have examined the performance of alternative models of asset prices. These models have generally fallen into two classes: ~1! multifactor models such as Ross ’ APT or Merton’s ICAPM, in which factors in addition to the market return determine asset prices; or ~2! nonparametric models, such as Bansal et al. ~1993!, Bansal and Viswanathan ~1993!, and Chapman ~1997!, in which the pricing kernel is not
Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence
 JOURNAL OF POLITICAL ECONOMY
, 1999
"... The Euler equations of consumption are tested on the household consumption of nondurables and services, reconstructed from the CEX database. The estimated relative risk aversion coefficient of the representative household decreases, and the estimated unexplained mean equity premium decreases, as inf ..."
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Cited by 64 (6 self)
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The Euler equations of consumption are tested on the household consumption of nondurables and services, reconstructed from the CEX database. The estimated relative risk aversion coefficient of the representative household decreases, and the estimated unexplained mean equity premium decreases, as infra marginal asset holders are eliminated from the sample. These results provide evidence of limited capital market participation. The estimated unexplained mean equity premium decreases when the assumption of complete consumption insurance is relaxed. The estimated correlation between the equity premium and the crosssectional variance of the households' consumption growth is negative, as required, if the relaxation of market completeness is to contribute towards the explanation of the premium. The overall evidence from asset prices in favor of relaxing the assumption of complete consumption insurance is weak. An extensive Monte Carlo investigation highlights the relationship between the economic implications of limited participation and the resulting statistical properties of commonly used test statistics. The simulation results provide direct evidence relating observation error in consumption and the resulting smallsample properties of the test statistics.
Consumption risk and the cross section of expected returns
 Journal of Political Economy
, 2005
"... This paper evaluates the central insight of the consumption capital asset pricing model that an asset’s expected return is determined by its equilibrium risk to consumption. Rather than measure risk by the contemporaneous covariance of an asset’s return and consumption growth, we measure risk by the ..."
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Cited by 31 (0 self)
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This paper evaluates the central insight of the consumption capital asset pricing model that an asset’s expected return is determined by its equilibrium risk to consumption. Rather than measure risk by the contemporaneous covariance of an asset’s return and consumption growth, we measure risk by the covariance of an asset’s return and consumption growth cumulated over many quarters following the return. While contemporaneous consumption risk explains little of the variation in average returns across the 25 FamaFrench portfolios, our measure of ultimate consumption risk at a horizon of three years explains a large fraction of this variation. I.
Idiosyncratic Consumption Risk and the Cross Section of Asset Returns
 Journal of Finance
, 2004
"... This paper investigates the importance of idiosyncratic consumption risk for the crosssectional variation in average returns on stocks and bonds. If idiosyncratic consumption risk is not priced, the only pricing factor in a multiperiod economy is the rate of aggregate consumption growth. We o®er ev ..."
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Cited by 22 (0 self)
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This paper investigates the importance of idiosyncratic consumption risk for the crosssectional variation in average returns on stocks and bonds. If idiosyncratic consumption risk is not priced, the only pricing factor in a multiperiod economy is the rate of aggregate consumption growth. We o®er evidence that the crosssectional variance of consumption growth is also a priced factor. This demonstrates that consumers are not fully insured against idiosyncratic consumption risk, and that asset returns re°ect their attempts to reduce their exposure to this risk. We ¯nd that over the sample period the resulting twofactor pricing model has lower HansenJagannathan distances than the CAPM and the FamaFrench threefactor model. Moreover, in the presence of the market factor and the size and booktomarket factors, the two consumption based factors retain explanatory power. Together with the results of Lettau and Ludvigson (2000), these ¯ndings indicate that consumptionbased asset pricing is relevant for explaining the crosssection of asset returns.
Asset Pricing with Conditioning Information: A New Test
, 1999
"... This paper develops a new approach to testing dynamic linear factor models, which aims at timevariation in Jensen's alphas while using a nonparametric pricing kernel to incorporate conditioning information. In application we find that the conditional CAPM performs substantially better than the stat ..."
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Cited by 21 (2 self)
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This paper develops a new approach to testing dynamic linear factor models, which aims at timevariation in Jensen's alphas while using a nonparametric pricing kernel to incorporate conditioning information. In application we find that the conditional CAPM performs substantially better than the static CAPM, but still it is statistically rejected. The conditional CAPM exhibits timevarying Jensen's alphas that have a strong size pattern in volatility and a clear booktomarket pattern in timeseries average. These features are well captured by a simple dynamic version of the Fama and French (1993) three factor model. Moreover, even with portfolios formed on past returns we can not reject this model. Recent research has documented evidence of timevariation in expected returns, return volatilities, and betas of nancial assets. Meanwhile, researchers have identified a number of anomalies against the unconditional version of the Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintn...
Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs
 Journal of International Money and Finance
, 2003
"... In an integrated world capital market, the same pricing kernel is applicable to all securities. We apply this idea to the stock returns of different countries. We investigate the underlying determinants of crosscountry stock return correlations. First, we determine, for a given, measured degree of ..."
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Cited by 14 (2 self)
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In an integrated world capital market, the same pricing kernel is applicable to all securities. We apply this idea to the stock returns of different countries. We investigate the underlying determinants of crosscountry stock return correlations. First, we determine, for a given, measured degree of commonality of country outputs, what should be the degree of correlation of national stock returns. We propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns. We then attempt to match the correlations generated by the model with measured correlations. Our results show that under the hypothesis of market segmentation, the model correlations are much smaller than observed correlations. However, assuming world markets are integrated, our model correlations closely match observed correlations. ∗Dumas and Ruiz acknowledge gratefully the support of the HEC Foundation. Ruiz acknowledges also gratefully the support of IFM2. Dumas is also affiliated with the University of Pennsylvania (as an Adjunct Professor), the
GMM Tests of Stochastic Discount Factor Models with Useless Factors
, 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 ..."
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Cited by 12 (5 self)
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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 presence of a useless factor, the power of the overidentifying restriction test in rejecting misspecified models is reduced, and in some cases a misspecified model with a useless factor is more likely to be accepted than the true model. JEL Classification: G12 Keywords: Stochastic discount factor models; Generalized method of moments; Nonidentifiability; Useless factors; Misspecification * Corresponding author. Tel.: 852/23587684; fax: 852/23581749; email: czhang@ust.hk. 1 We would like to thank ...
Stock Returns and Dividend Yields Revisited: A New Way to Look at an Old Problem
, 1997
"... We introduce a new statistical method for finding good confidence intervals for unknown parameters in the context of dependent and possibly heteroskedastic random variables, called subsampling. It works under very weak conditions and avoids the pitfalls of having to choose a structural model to f ..."
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Cited by 9 (0 self)
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We introduce a new statistical method for finding good confidence intervals for unknown parameters in the context of dependent and possibly heteroskedastic random variables, called subsampling. It works under very weak conditions and avoids the pitfalls of having to choose a structural model to fit to observed data. Appropriate simulation studies suggest that is has better small sample properties than the GMM method, which also works under weak conditions and is modelfree. We use the subsampling method to discuss the problem of whether stock returns can be predicted from dividend yields. Looking at three data sets, we do not find convincing evidence for predictability of stock returns.