We propose a framework for estimation and inference about the parameters of an economic model and predictions based on it, when the model may be misspecified. We rely on a local asymptotic approach where the degree of misspecification is indexed by the sample size. We derive formulas to...

This paper is concerned with statistical inference and model evaluation in possibly misspecified and unidentified linear asset-pricing models estimated by maximum likelihood and one-step generalized method of moments. Strikingly, when spurious factors (that is, factors that are uncorrelated with...

Leamer first pointed out that a regression model is valid only if all of the assumptions under which it is constructed are valid. In particular, this means that all of relevant regressors which are determinants must be included. In practice, applied econometricians assume that whatever model...