Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/227477
Authors: 
Laurinaityte, Nora
Meinerding, Christoph
Schlag, Christian
Thimme, Julian
Year of Publication: 
2020
Series/Report no.: 
Bundesbank Discussion Paper No. 62/2020
Abstract: 
Cross-sectional asset pricing tests with GMM can generate spuriouslyhigh explanatory power for factor models when the moment conditions are specifiedsuch that they allow the estimated factor means to substantially deviate from theobserved sample averages. In fact, by shifting the weights on the moment conditions,any level of cross-sectional fit can be attained. This property is a feature of the GMMestimation design and applies to strong as well as weak factors, and to all samplesizes and test assets. We reveal the origins of this bias theoretically, gauge its sizeusing simulations, and document its relevance empirically.
Subjects: 
asset pricing
cross-section of expected returns
GMM
factor zoo
JEL: 
G00
G12
C21
C13
ISBN: 
978-3-95729-797-6
Document Type: 
Working Paper

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