Give me strong moments and time: Combining GMM and SMM to estimate long-run risk asset pricing models

Arbeitspapier

The long-run consumption risk (LRR) model is a promising approach to resolve prominent asset pricing puzzles. The simulated method of moments (SMM) provides a natural framework to estimate its deep parameters, but caveats concern model solubility and weak identification. We propose a twostep estimation strategy that combines GMM and SMM, and for which we elicit informative macroeconomic and financial moment matches from the LRR model structure. In particular, we exploit the persistent serial correlation of consumption and dividend growth and the equilibrium conditions for market return and risk-free rate, as well as the model-implied predictability of the risk-free rate. We match analytical moments when possible and simulated moments when necessary and determine the crucial factors required for both identification and reasonable estimation precision. A simulation study - the first in the context of long-run risk modeling - delineates the pitfalls associated with SMM estimation of a non-linear dynamic asset pricing model. Our study provides a blueprint for successful estimation of the LRR model.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFS Working Paper Series ; No. 479

Classification and Topics

• Classification: Wirtschaft ; Financial Econometrics ; General Financial Markets: General (includes Measurement and Data) ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: asset pricing ; long-run risk ; simulated method of moments

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Grammig, Joachim ; Schaub, Eva-Maria
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (where): Frankfurt a. M.
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/102696
• Last update: 10.03.2025, 11:43 AM CET