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102
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 451 (8 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 231 (10 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 146 (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 114 (10 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 68 (1 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.
Sources of risk and expected returns in global equity markets
 Journal of Banking and Finance
, 1994
"... This paper empirically examines multifactor asset pricing models for the returns and expected returns on eighteen national equity markets. The factors are chosen to measure global economic risks. Although previous studies do not reject the unconditional meanvariance efficiency of a world market por ..."
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Cited by 45 (6 self)
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This paper empirically examines multifactor asset pricing models for the returns and expected returns on eighteen national equity markets. The factors are chosen to measure global economic risks. Although previous studies do not reject the unconditional meanvariance efficiency of a world market portfolio, our evidence indicates that the tests are low in power, and the world market betas do not provide a good explanation of crosssectional differences in average returns. Multiple beta models provide an improved explanation of the equity returns.
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 32 (3 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
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 ..."
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Cited by 29 (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...
Evaluating Government Bond Fund Performance with Stochastic Discount Factors
 Review of Financial Studies
, 2006
"... This paper shows how to evaluate the performance of managed portfolios using stochastic discount factors from continuoustime term structure models. These models imply empirical factors that include timeaverages of the underlying state variables. The approach addresses a performance measurement bias ..."
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Cited by 24 (6 self)
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This paper shows how to evaluate the performance of managed portfolios using stochastic discount factors from continuoustime term structure models. These models imply empirical factors that include timeaverages of the underlying state variables. The approach addresses a performance measurement bias, described by Goetzmann, Ingersoll and Ivkovic (2000) and Ferson and Khang (2002), arising because fund managers may trade within the return measurement interval or hold positions in replicable options. The empirical factors contribute explanatory power in factor model regressions and reduce model pricing