Cross-section and GMM/SDF tests of linear factor models

This study follows the appropriate Cochrane (2005) framework for comparing the estimates' standard errors, -statistics and statistics that pricing errors are jointly zero of the beta and the Generalized Method of Moments/Stochastic Discount Factor (GMM/SDF) methods in testing linear factor models. I extend his work by using the Fama-French three-factor model. The study finds that the GMM/SDF estimators' standard errors and -statistics behave very similarly to those obtained by the beta method, and the methods give almost exactly the same statistics. Unlike Rubio and Lozano (2011) conclusion, I find that Cochrane (2005) results are extensible to the Fama-French three-factor model. The results are robust using an extended sample period that ends in February 2020.