Munich Personal RePEc Archive

Fat Tails and Spurious Estimation of Consumption-Based Asset Pricing Models

Toda, Alexis Akira and Walsh, Kieran James (2016): Fat Tails and Spurious Estimation of Consumption-Based Asset Pricing Models. Forthcoming in: Journal of Applied Econometrics

[img]
Preview
PDF
MPRA_paper_78980.pdf

Download (8MB) | Preview

Abstract

The standard generalized method of moments (GMM) estimation of Euler equations in heterogeneous-agent consumption-based asset pricing models is inconsistent under fat tails because the GMM criterion is asymptotically random. To illustrate this, we generate asset returns and consumption data from an incomplete-market dynamic general equilibrium model that is analytically solvable and exhibits power laws in consumption. Monte Carlo experiments suggest that the standard GMM estimation is inconsistent and susceptible to Type II errors (incorrect non-rejection of false models). Estimating an overidentified model by dividing agents into age cohorts appears to mitigate Type I and II errors.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.