econ583lab6fall2009 - Econ 583 Lab 5 Eric Zivot Fall 2008...

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Econ 583 Lab 5 Eric Zivot Fall 2008 Due: Wednesday, November 26. 1 Reading 1. Hayashi, Chapter 7. 2. Hall, Chapter 3. 2 Nonlinear GMM Estimation In this exercise, you will estimate a typical Euler equation asset pricing model. The data for the exercise consists of monthly observations on gross consumption growth, C t /C t 1 , and returns, R jt , for ten size sorted portfolios and T-Bills (risk free rate). (see Zivot and Wang 2005, chapter 21 for an example using S-PLUS). Consider an Euler equation asset pricing model that allows the individual to invest in J risky assets with returns R j,t +1 ( j = 1 , . . . , J ) , as well as a risk-free asset with certain return R f,t +1 . Assuming power utility over consumption C U ( C ) = C 1 α 0 1 α 0 α 0 = risk aversion parameter the Euler equations may be written as the system of J + 1 nonlinear equaitons E " (1 + R f,t +1 ) β 0 μ C t +1 C t α 0 | I t # 1 = 0 E " ( R j,t +1 R f,t +1 ) β 0 μ C t +1 C t α 0 | I t # = 0 , j = 1 , . . . , J where I t represents information available at time t and β 0 represents the time discount
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