Asset Pricing Lecture 7: Generalized Method of Moments

This lecture covers the Generalized Method of Moments (GMM). How do you estimate alphas, betas, and lambdas; how do you evaluate if models are any good? GMM is a very flexible econometric framework for lots of problems, and we’ll also explore that a bit. 

1  Readings

Guide to above readings:

  • Hansen 1982 is The Article that defines GMM. Read it (at least) three times. The first time through, just understand the notation and the statement of the theorems. Find the GMM estimate defined, standard errors, test statistics. Get ready to use GMM. The second time through, read the “if” part of the proofs. Understand the stationarity, ergodicity, etc. assumptions. They matter! Finally, try to read the proofs.
  • Hansen and Singleton (1982) is the crucial application to the consumption based model.
  • GMM Notes is a written version of my notes for the lectures. It’s not exactly one to one, I condensed the lectures. The lectures and pdfs of the whiteboards should be enough. This is one place to turn if those are confusing, and hence just an optional resource.
  • The Brief Parable of Overdifferencing is a good example for the “Choosing a W matrix” lecture, showing you how statistical efficiency can lead to bad estimators.

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Asset Pricing Lecture 6: Factor Pricing Models

This lecture covers some of the common factor models used in asset pricing: the Capital Asset Pricing Model (CAPM), the Intertemporal Capital Asset Pricing Model (ICAPM), the Arbitrage Pricing Theory (APT), and how they relate to each other.

1  Readings

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Asset Pricing Lecture 5: mean-variance frontier

This asset pricing lecture covers the mean-variance frontier, beta representations, the relationship between the discount factor, mean-variance and beta representations, and conditioning information.

1  Readings

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Asset Pricing Lecture 4: Discount Factor

This asset pricing lecture covers some details about the discount factor.

1  Readings

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Asset Pricing Lecture 3: Classic Issues in Finance

This lecture covers some classic issues in finance.

1  Readings

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Asset Pricing Lecture 2: Challenging Facts and Basic Consumption-Based Model

This is an introduction and overview of asset pricing, covering challenging facts and basic consumption-based model.

1  Readings

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Asset Pricing Lecture 1: Stochastic Calculus Review

This lecture is a review covering some basic concepts in stochastic calculus and time-series processes.

1  Readings

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