| Content | 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-misspecied factor model, the shrinkage method can provide a good estimator for the weighting matrix, and hence improve the nite-sample performance of the GMM-based Wald tests. |
