A Tutorial on the Generalized Method of Moments (GMM) in Finance

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Published: Jan 24, 2022
DOI: https://doi.org/10.1590/1982-7849rac2022210287.en
Keywords:
GMM, asset pricing, interest rate

Main Article Content

Alan de Genaro
Fundação Getulio Vargas, Escola de Administração de Empresas de São Paulo, São Paulo, SP, Brasil
https://orcid.org/0000-0002-9839-6116 orcid
Paula Astorino
Fundação Getulio Vargas, Escola de Administração de Empresas de São Paulo, São Paulo, SP, Brasil
https://orcid.org/0000-0001-9811-146X orcid

Abstract

Context: empirical problems in which the researcher is faced with a model that is partially specified. In these cases, the GMM method is the natural alternative for estimating the parameters of interest. Objective: the goal of this paper is to offer a tutorial that allows the researcher to understand both the theory and empirical aspects of the GMM method. Methods: we discuss the GMM concepts, forms of estimation, and limitations associated with the method. As a way of illustrating the method, we use two applications in the area of empirical finance. The first application is the estimation of the parameters of a consumption-based asset pricing models; the second is the estimation of the parameters of the evolution of the interest rate in continuous time. The data and codes in R are provided as online appendices. Conclusion: the GMM method can be used in problems where other methods such as maximum likelihood are not feasible, or even when the researcher wants to estimate a model partially specified.



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How to Cite
Genaro, A. de, & Astorino, P. (2022). A Tutorial on the Generalized Method of Moments (GMM) in Finance. Journal of Contemporary Administration, 26(Sup. 1), e210287. https://doi.org/10.1590/1982-7849rac2022210287.en
Issue
Vol. 26 No. Sup. 1 (2022): Supplementary Issue 1 - 2022
Section
Methodological Articles

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