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Analytical solution for the constrained Hansen-Jagannathan distance under multivariate ellipticity

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  • Nikolay Gospodinov
  • Raymond Kan
  • Cesare Robotti

Abstract

We provide an in-depth analysis of the theoretical properties of the Hansen-Jagannathan (HJ) distance that incorporates a no-arbitrage constraint. Under a multivariate elliptical distribution assumption, we present explicit expressions for the HJ-distance with a no-arbitrage constraint, the associated Lagrange multipliers, and the SDF parameters in the case of linear SDFs. This approach allows us to analyze the benefits and costs of using the HJ-distance with a no-arbitrage constraint to rank asset pricing models.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2012-18.

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Date of creation: 2012
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Handle: RePEc:fip:fedawp:2012-18

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  1. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
  2. Mahmoud Hamada & Emiliano A. Valdez, 2008. "CAPM and Option Pricing With Elliptically Contoured Distributions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(2), pages 387-409.
  3. Hansen, Lars Peter & Heaton, John & Luttmer, Erzo G J, 1995. "Econometric Evaluation of Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 237-74.
  4. Raymond Kan & Cesare Robotti, 2007. "Model comparison using the Hansen-Jagannathan distance," Working Paper 2007-04, Federal Reserve Bank of Atlanta.
  5. Raymond Kan & Cesare Robotti, 2008. "The exact distribution of the Hansen-Jagannathan bound," Working Paper 2008-09, Federal Reserve Bank of Atlanta.
  6. Owen, Joel & Rabinovitch, Ramon, 1983. " On the Class of Elliptical Distributions and Their Applications to the Theory of Portfolio Choice," Journal of Finance, American Finance Association, vol. 38(3), pages 745-52, June.
  7. John Y. Campbell & John H. Cochrane, 2000. "Explaining the Poor Performance of Consumption-based Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(6), pages 2863-2878, December.
  8. Bansal, Ravi & Hsieh, David A & Viswanathan, S, 1993. " A New Approach to International Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 48(5), pages 1719-47, December.
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