Efficient Estimation of Linear Asset Pricing Models with Moving-Average Errors / Lars Peter Hansen, Kenneth J. Singleton.

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Hansen, Lars Peter

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TextSeries: Technical Working Paper Series (National Bureau of Economic Research) ; no. t0086.Publication details: Cambridge, Mass. National Bureau of Economic Research 1997.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper explores in depth the nature of the conditional moment restrictions implied by log-linear intertemporal capital asset pricing models (ICAPMs) and shows that the generalized instrumental variables (GMM) estimators of these models (as typically implemented in practice) are inefficient. The moment conditions in the presence of temporally aggregated consumption are derived for two log-linear ICAPMs. The first is a continuous time model in which agents maximize expected utility. In the context of this model, we show that there are important asymmetries between the implied moment conditions for infinitely and finitely-lived securities. The second model assumes that agents maximize non-expected utility, and leads to a very similar econometric relation for the return on the wealth portfolio. Then we describe the efficiency bound (greatest lower bound for the asymptotic variances) of the CNN estimators of the preference parameters in these models. In addition, we calculate the efficient CNN estimators that attain this bound. Finally, we assess the gains in precision from using this optimal CNN estimator relative to the commonly used inefficient CMN estimators.

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Previous	nber t0083 A Simple MLE of Cointegrating Vectors in Higher Order Integrated Systems /	nber t0084 The Ramsey Problem for Congestible Facilities /	nber t0085 On the Formulation of Uniform Laws of Large Numbers: A Truncation Approach /	nber t0086 Efficient Estimation of Linear Asset Pricing Models with Moving-Average Errors /	nber t0087 Simulated Moments Estimation of Markov Models of Asset Prices /	nber t0088 Does Correcting for Heteroskedasticity Help? /	nber t0089 Implications of Security Market Data for Models of Dynamic Economies /	Next

March 1997.

This paper explores in depth the nature of the conditional moment restrictions implied by log-linear intertemporal capital asset pricing models (ICAPMs) and shows that the generalized instrumental variables (GMM) estimators of these models (as typically implemented in practice) are inefficient. The moment conditions in the presence of temporally aggregated consumption are derived for two log-linear ICAPMs. The first is a continuous time model in which agents maximize expected utility. In the context of this model, we show that there are important asymmetries between the implied moment conditions for infinitely and finitely-lived securities. The second model assumes that agents maximize non-expected utility, and leads to a very similar econometric relation for the return on the wealth portfolio. Then we describe the efficiency bound (greatest lower bound for the asymptotic variances) of the CNN estimators of the preference parameters in these models. In addition, we calculate the efficient CNN estimators that attain this bound. Finally, we assess the gains in precision from using this optimal CNN estimator relative to the commonly used inefficient CMN estimators.