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A new measure of model misspecification with the no-arbitrage constraint: extending the second Hansen–Jagannathan distance

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  • Yuewu Xu

    (Fordham University)

Abstract

This paper proposes a new measure for evaluating asset pricing models with the no-arbitrage constraint which naturally extends the classical (second) distance of Hansen and Jagannathan (J Polit Econ 99(2):225–262, 1991, J Finance 52(2):57–590, 1997). The new measure is designed to capture model misspecifications in terms of arbitrary moments/co-moments in the stochastic discount factors in contrast to the classical Hansen–Jagannathan distance which only uses information contained in the first two moments/co-moments. The new measure $$D_{p}^{+}$$ D p + is defined for any $$1

Suggested Citation

  • Yuewu Xu, 2021. "A new measure of model misspecification with the no-arbitrage constraint: extending the second Hansen–Jagannathan distance," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 917-938, April.
    • Handle: RePEc:kap:rqfnac:v:56:y:2021:i:3:d:10.1007_s11156-020-00913-w
    DOI: 10.1007/s11156-020-00913-w
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    More about this item

    Keywords

    Stochastic discount factor; Hansen–Jagannathan distance; $$L^{p}$$ L p -distance; Higher moments; Skewness and Kurtosis; No-arbitrage;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets

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