Abstract
GMM-based Wald tests tend to overreject when used for small samples, mainly due to inaccurate estimation of the weighting matrix. This article proposes applying the shrinkage method to address this problem. Using a possibly-misspecified factor model, the shrinkage method can provide a good estimator for the weighting matrix, and hence improve the finite-sample performance of the GMM-based Wald tests.
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We thank the editor, the associate editor and the referee for their comments. We also thank Ying Shang for her help. Ren’s research was supported by Xiamen University, the Natural Science Foundation of Fujian Province of China (Grant no. 2011J01384) and the Natural Science Foundation of China (Grant no. 71131008 and no. 70971113).
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Chen, Q., Ren, Y. Improvement in finite-sample properties of GMM-based Wald tests. Comput Stat 28, 735–749 (2013). https://doi.org/10.1007/s00180-012-0326-0
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DOI: https://doi.org/10.1007/s00180-012-0326-0