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Evaluating asset-pricing models using the Hansen-Jagannathan bound: a Monte Carlo investigation

Author

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  • Christopher Otrok

    (Department of Economics, P.O. Box 400182, 114 Rouss Hall, The University of Virginia, Charlottesville, VA 22904-4182, USA)

  • B. Ravikumar

    (Department of Economics, 108 Pappajohn Business Building, The University of Iowa, Iowa City, IA 52242-1000, USA)

  • Charles H. Whiteman

    (Department of Economics, 108 Pappajohn Business Building, The University of Iowa, Iowa City, IA 52242-1000, USA)

Abstract

We use recent statistical tests, based on a 'distance' between the model and the Hansen-Jagannathan bound, to compute the rejection rates of true models. For asset-pricing models with time-separable preferences, the finite-sample distribution of the test statistic associated with the risk-neutral case is extreme, in the sense that critical values based on this distribution deliver type I errors no larger than intended-regardless of risk aversion or the rate of time preference. We also show that these maximal-type-I-error critical values are appropriate for both time and state non-separable preferences and that they yield acceptably small type II error rates. Copyright © 2002 John Wiley & Sons, Ltd.

Suggested Citation

  • Christopher Otrok & B. Ravikumar & Charles H. Whiteman, 2002. "Evaluating asset-pricing models using the Hansen-Jagannathan bound: a Monte Carlo investigation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(2), pages 149-174.
  • Handle: RePEc:jae:japmet:v:17:y:2002:i:2:p:149-174
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    References listed on IDEAS

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    Cited by:

    1. Raymond Kan & Cesare Robotti, 2016. "The Exact Distribution of the Hansen–Jagannathan Bound," Management Science, INFORMS, vol. 62(7), pages 1915-1943, July.
    2. Raymond Kan & Cesare Robotti, 2008. "The exact distribution of the Hansen-Jagannathan bound," FRB Atlanta Working Paper 2008-09, Federal Reserve Bank of Atlanta.
    3. Houssa, Romain, 2013. "Uncertainty about welfare effects of consumption fluctuations," European Economic Review, Elsevier, vol. 59(C), pages 35-62.
    4. Qiang Zhang, 2004. "Accounting for Human Capital and Weak Identification in Evaluating the Esptein-Zin-Weil Non-Expected Utility Model of Asset Pricing," CIRJE F-Series CIRJE-F-289, CIRJE, Faculty of Economics, University of Tokyo.
    5. Silos, Pedro, 2006. "Assessing Markov chain approximations: A minimal econometric approach," Journal of Economic Dynamics and Control, Elsevier, vol. 30(6), pages 1063-1079, June.
    6. Engsted, Tom, 2002. " Measures of Fit for Rational Expectations Models," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 301-355, July.
    7. Otrok, Christopher & Ravikumar, B & Whiteman, Charles, 2001. "Stochastic Discount Factor Models and the Equity Premium Puzzle," MPRA Paper 22938, University Library of Munich, Germany, revised Nov 2004.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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