GMM with Weak Identification
Article first published online: 10 DEC 2003
Econometric Society 2000
Volume 68, Issue 5, pages 1055–1096, September 2000
How to Cite
Stock, J. H. and Wright, J. H. (2000), GMM with Weak Identification. Econometrica, 68: 1055–1096. doi: 10.1111/1468-0262.00151
- Issue published online: 10 DEC 2003
- Article first published online: 10 DEC 2003
- Instrumental variables;
- empirical processes;
- Euler equation estimation;
- asset pricing.
This paper develops asymptotic distribution theory for GMM estimators and test statistics when some or all of the parameters are weakly identified. General results are obtained and are specialized to two important cases: linear instrumental variables regression and Euler equations estimation of the CCAPM. Numerical results for the CCAPM demonstrate that weak-identification asymptotics explains the breakdown of conventional GMM procedures documented in previous Monte Carlo studies. Confidence sets immune to weak identification are proposed. We use these results to inform an empirical investigation of various CCAPM specifications; the substantive conclusions reached differ from those obtained using conventional methods.