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Abstract

Jagannathan and Wang (1996) derive the asymptotic distribution of the Hansen-Jagannathan distance (HJ-distance) proposed by Hansen and Jagannathan (1997), and develop a specification test of asset pricing models based on the HJ-distance. While the HJ-distance has several desirable properties, Ahn and Gadarowski (2004) find that the specification test based on the HJ-distance overrejects correct models too severely in commonly used sample size to provide a valid test. This paper proposes to improve the finite sample properties of the HJ-distance test by applying the shrinkage method (Ledoit and Wolf, 2003) to compute its weighting matrix. The proposed method improves the finite sample performance of the HJ-distance test significantly.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1126.pdf
File Function: First version 2007
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1126.

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Length: 38 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:qed:wpaper:1126

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Postal: Kingston, Ontario, K7L 3N6
Phone: (613) 533-2250
Fax: (613) 533-6668
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Web page: http://qed.econ.queensu.ca/
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Related research

Keywords: Covariance matrix estimation; Factor models; Finite sample properties; Hansen-Jagannathan distance; Shrinkage method;

Other versions of this item:

Find related papers by JEL classification:

• C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
• C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
• G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

This paper has been announced in the following NEP Reports:

• NEP-ALL-2007-06-30 (All new papers)
• NEP-ECM-2007-06-30 (Econometrics)

References

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