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Rev Fin 1994; 7:687-709
© 1994 the Society for Financial Studies

Article

Analytical GMM tests: asset pricing with time-varying risk premiums

G Zhou
JM Olin School of Business, Washington University, St Louis, MO 63130, USA

Abstract

We propose alternative generalized method of moments (GMM) tests that are analytically solvable in many econometric models, yielding in particular analytical GMM tests for asset pricing models with time-varying risk premiums. We also provide simulation evidence showing that the proposed tests have good finite sample properties and that their asymptotic distribution is reliable for the sample size commonly used. We apply our tests to study the number of latent factors in the predictable variations of the returns on portfolios grouped by industries. Using data from October 1941 to September 1986 and two sets of instrumental variables, we find that the tests reject a one factor model but not a two-factor one.


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