IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-03287946.html
   My bibliography  Save this paper

Tradable or nontradable factors : what does the Hansen–Jagannathan distance tell us?

Author

Listed:
  • Xiang Zhang

    (EM - EMLyon Business School)

  • Yangyi Liu
  • Kun Wu
  • Bertrand Maillet

Abstract

We investigate the difference in pricing cross-sectional risky assets performance between tradable and nontradable factors by comparing their misspecification errors—the Hansen–Jagannathan (HJ) distance. By constructing nontradable factors mimicking portfolios (FMPs) and incorporating them into the least-misspecified tradable stochastic dis-count factor (SDF), we provide cross-country empirical evidence that this SDF that combines tradable and nontradable factors dominates others in which nontradable factors further decrease the SDF's mis-specification errors. Since nontradable FMPs are functions of current tradable factor information about the economic state, FMPs "hedge" the state variable risks, and FMPs' returns describe the risk premiums.

Suggested Citation

  • Xiang Zhang & Yangyi Liu & Kun Wu & Bertrand Maillet, 2021. "Tradable or nontradable factors : what does the Hansen–Jagannathan distance tell us?," Post-Print hal-03287946, HAL.
    • Handle: RePEc:hal:journl:hal-03287946
    Note: View the original document on HAL open archive server: https://hal.science/hal-03287946
    as

    Download full text from publisher

    File URL: https://hal.science/hal-03287946/document
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Gospodinov, Nikolay & Kan, Raymond & Robotti, Cesare, 2013. "Chi-squared tests for evaluation and comparison of asset pricing models," Journal of Econometrics, Elsevier, vol. 173(1), pages 108-125.
    3. Jagannathan, Ravi & Wang, Zhenyu, 1996. "The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
    4. Hanno N. Lustig & Stijn G. Van Nieuwerburgh, 2005. "Housing Collateral, Consumption Insurance, and Risk Premia: An Empirical Perspective," Journal of Finance, American Finance Association, vol. 60(3), pages 1167-1219, June.
    5. Piazzesi, Monika & Schneider, Martin & Tuzel, Selale, 2007. "Housing, consumption and asset pricing," Journal of Financial Economics, Elsevier, vol. 83(3), pages 531-569, March.
    6. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.
    7. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    8. Francisco Barillas & Jay Shanken, 2018. "Comparing Asset Pricing Models," Journal of Finance, American Finance Association, vol. 73(2), pages 715-754, April.
    9. Nikolay Gospodinov & Raymond Kan & Cesare Robotti, 2014. "Misspecification-Robust Inference in Linear Asset-Pricing Models with Irrelevant Risk Factors," The Review of Financial Studies, Society for Financial Studies, vol. 27(7), pages 2139-2170.
    10. Frazzini, Andrea & Pedersen, Lasse Heje, 2014. "Betting against beta," Journal of Financial Economics, Elsevier, vol. 111(1), pages 1-25.
    11. Tobias Adrian & Erkko Etula & Tyler Muir, 2014. "Financial Intermediaries and the Cross-Section of Asset Returns," Journal of Finance, American Finance Association, vol. 69(6), pages 2557-2596, December.
    12. Hodrick, Robert J. & Zhang, Xiaoyan, 2001. "Evaluating the specification errors of asset pricing models," Journal of Financial Economics, Elsevier, vol. 62(2), pages 327-376, November.
    13. Ball, Ray & Gerakos, Joseph & Linnainmaa, Juhani T. & Nikolaev, Valeri, 2016. "Accruals, cash flows, and operating profitability in the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 121(1), pages 28-45.
    14. R. David Mclean & Jeffrey Pontiff, 2016. "Does Academic Research Destroy Stock Return Predictability?," Journal of Finance, American Finance Association, vol. 71(1), pages 5-32, February.
    15. Kewei Hou & Chen Xue & Lu Zhang, 2015. "Editor's Choice Digesting Anomalies: An Investment Approach," The Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 650-705.
    16. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    17. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    18. Hansen, Lars Peter & Jagannathan, Ravi, 1997. "Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-590, June.
    19. Ferson, Wayne & Siegel, Andrew F. & Xu, Pisun (Tracy), 2006. "Mimicking Portfolios with Conditioning Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(3), pages 607-635, September.
    20. Liu, Jianan & Stambaugh, Robert F. & Yuan, Yu, 2019. "Size and value in China," Journal of Financial Economics, Elsevier, vol. 134(1), pages 48-69.
    21. Frank Kleibergen & Zhaoguo Zhan, 2020. "Robust Inference for Consumption‐Based Asset Pricing," Journal of Finance, American Finance Association, vol. 75(1), pages 507-550, February.
    22. Kan, Raymond & Robotti, Cesare, 2008. "Specification tests of asset pricing models using excess returns," Journal of Empirical Finance, Elsevier, vol. 15(5), pages 816-838, December.
    23. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    24. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    25. Xiaohong Chen & Sydney C. Ludvigson, 2009. "Land of addicts? an empirical investigation of habit‐based asset pricing models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(7), pages 1057-1093, November.
    26. Ludvigson, Sydney C., 2013. "Advances in Consumption-Based Asset Pricing: Empirical Tests," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 799-906, Elsevier.
    27. Jonathan A. Parker & Christian Julliard, 2005. "Consumption Risk and the Cross Section of Expected Returns," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 185-222, February.
    28. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    29. Balduzzi, Pierluigi & Robotti, Cesare, 2008. "Mimicking Portfolios, Economic Risk Premia, and Tests of Multi-Beta Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 354-368.
    30. Li, Haitao & Xu, Yuewu & Zhang, Xiaoyan, 2010. "Evaluating asset pricing models using the second Hansen-Jagannathan distance," Journal of Financial Economics, Elsevier, vol. 97(2), pages 279-301, August.
    31. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    32. Nikolay Gospodinov & Raymond Kan & Cesare Robotti, 2017. "Spurious Inference in Reduced‐Rank Asset‐Pricing Models," Econometrica, Econometric Society, vol. 85, pages 1613-1628, September.
    33. John M. Griffin & Xiuqing Ji & J. Spencer Martin, 2003. "Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole," Journal of Finance, American Finance Association, vol. 58(6), pages 2515-2547, December.
    34. Wolak, Frank A., 1989. "Testing inequality constraints in linear econometric models," Journal of Econometrics, Elsevier, vol. 41(2), pages 205-235, June.
    35. Maria Vassalou & Yuhang Xing, 2004. "Default Risk in Equity Returns," Journal of Finance, American Finance Association, vol. 59(2), pages 831-868, April.
    36. Zhang, Xiaoyan, 2006. "Specification tests of international asset pricing models," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 275-307, March.
    37. Motohiro Yogo, 2006. "A Consumption‐Based Explanation of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 61(2), pages 539-580, April.
    38. Hou, Kewei & Xue, Chen & Zhang, Lu, 2017. "Replicating Anomalies," Working Paper Series 2017-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    39. Frank Kleibergen & Zhaoguo Zhan, 2018. "Identification-Robust Inference on Risk Premia of Mimicking Portfolios of Non-traded Factors," Journal of Financial Econometrics, Oxford University Press, vol. 16(2), pages 155-190.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kim, Jinyong & Kim, Kun Ho & Lee, Jeong Hwan, 2021. "Cross-sectional tests of asset pricing models with full-rank mimicking portfolios," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Patrick Gagliardini & Diego Ronchetti, 2020. "Comparing Asset Pricing Models by the Conditional Hansen-Jagannathan Distance," Journal of Financial Econometrics, Oxford University Press, vol. 18(2), pages 333-394.
    2. Gospodinov, Nikolay & Kan, Raymond & Robotti, Cesare, 2019. "Too good to be true? Fallacies in evaluating risk factor models," Journal of Financial Economics, Elsevier, vol. 132(2), pages 451-471.
    3. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    4. Kim, Jinyong & Kim, Kun Ho & Lee, Jeong Hwan, 2021. "Cross-sectional tests of asset pricing models with full-rank mimicking portfolios," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    5. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    6. Stefano Giglio & Dacheng Xiu, 2017. "Inference on Risk Premia in the Presence of Omitted Factors," NBER Working Papers 23527, National Bureau of Economic Research, Inc.
    7. Fletcher, Jonathan, 2014. "Benchmark models of expected returns in U.K. portfolio performance: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 30-46.
    8. Keunbae Ahn, 2021. "Predictable Fluctuations in the Cross-Section and Time-Series of Asset Prices," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2021.
    9. Gospodinov, Nikolay & Robotti, Cesare, 2021. "Common pricing across asset classes: Empirical evidence revisited," Journal of Financial Economics, Elsevier, vol. 140(1), pages 292-324.
    10. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    11. Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, vol. 106(3), pages 586-613.
    12. Hollstein, Fabian & Prokopczuk, Marcel, 2022. "Testing Factor Models in the Cross-Section," Journal of Banking & Finance, Elsevier, vol. 145(C).
    13. Kang, Hankil & Kang, Jangkoo & Lee, Changjun, 2017. "Ultimate consumption risk and investment-based stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 473-486.
    14. Gospodinov, Nikolay & Kan, Raymond & Robotti, Cesare, 2016. "On the properties of the constrained Hansen–Jagannathan distance," Journal of Empirical Finance, Elsevier, vol. 36(C), pages 121-150.
    15. Guanhao Feng & Stefano Giglio & Dacheng Xiu, 2020. "Taming the Factor Zoo: A Test of New Factors," Journal of Finance, American Finance Association, vol. 75(3), pages 1327-1370, June.
    16. Maio, Paulo & Philip, Dennis, 2018. "Economic activity and momentum profits: Further evidence," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 466-482.
    17. Mateus, Irina B. & Mateus, Cesario & Todorovic, Natasa, 2019. "Review of new trends in the literature on factor models and mutual fund performance," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 344-354.
    18. Maio, Paulo & Silva, André C., 2020. "Asset pricing implications of money: New evidence," Journal of Banking & Finance, Elsevier, vol. 120(C).
    19. Clarke, Charles, 2022. "The level, slope, and curve factor model for stocks," Journal of Financial Economics, Elsevier, vol. 143(1), pages 159-187.
    20. Qi Shi & Bin Li & Adrian (Wai Kong) Cheung & Richard Chung, 2017. "Augmenting the intertemporal CAPM with inflation: Further evidence from alternative models," Australian Journal of Management, Australian School of Business, vol. 42(4), pages 653-672, November.

    More about this item

    Keywords

    Tradable and nontradable factors; Hansen–Jagannathan distance; Misspecification errors; Factors mimicking portfolios;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-03287946. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.