Generalized Methods of Moments: Applications in Finance

We provide a brief overview of applications of generalized method of moments in finance. The models examined in the empirical finance literature, especially in the asset pricing area, often imply moment conditions that can be used in a straight forward way to estimate the model parameters without making strong assumptions regarding the stochastic properties of variables observed by the econometrician. Typically the number of moment conditions available to the econometrician would exceed the number of model parameters. This gives rise to overidentifying restrictions that can be used to test the validity of the model specifications. These advantages have led to the widespread use of the generalized method of moments in the empirical finance literature.