NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Winston Wei Dou

2318 Steinberg Hall - Dietrich Hall
The Wharton School at University of Pennsylvania
3620 Locust Walk, Philadelphia, PA 19104
Philedalphia, Penn 19104
Tel: 6465468769

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Institutional Affiliation: University of Pennsylvania

NBER Working Papers and Publications

November 2019Measuring “Dark Matter” in Asset Pricing Models
with Hui Chen, Leonid Kogan: w26418
We introduce an information-based fragility measure for GMM models that are potentially misspecified and unstable. A large fragility measure signifies a GMM model's lack of internal refutability (weak power of specification tests) and external validity (poor out-of-sample fit). The fragility of a set of model-implied moment restrictions is tightly linked to the quantity of additional information the econometrician can obtain about the model parameters by imposing these restrictions. Our fragility measure can be computed at little cost even for complex dynamic structural models. We illustrate its applications via two models: a rare-disaster risk model and a long-run risk model.
 
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