News‎ > ‎

New title and content for elephants

posted Jul 14, 2020, 6:01 AM by Julian Thimme   [ updated Jul 14, 2020, 6:03 AM ]
We updated our paper on the impact of the weighting matrix in cross-sectional asset pricing tests with GMM, formerly entitled "Elephants and the cross-section of expected returns". The new title is "GMM weighting matrices in cross-sectional asset pricing tests". The new version provides a more thorough analysis of the described issue with GMM estimations of misspecified models. The key take-away from our paper is that factor models, even those with strong factors, can appear to have a very good pricing performance, although the factors are actually unpriced, i.e., the factor exposures are uncorrelated with average returns in the cross-section. The new version can be found here.