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Extending the Hansen–Jagannathan distance measure of model misspecification

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  • Xu, Yuewu
  • Yao, Xiangkun

Abstract

This paper proposes a natural extension of the classical (Hansen and Jagannathan, 1991, 1997) for performance evaluation of asset pricing models. Our new distance captures misspecification of asset pricing models in terms of arbitrary moments of the stochastic discount factors, as opposed to the Hansen–Jagannathan distance which focuses only on the second moment. The relationship between the new distance and the pricing error is established. A key representation of the new distance is obtained by solving the conjugate problem explicitly.

Suggested Citation

  • Xu, Yuewu & Yao, Xiangkun, 2019. "Extending the Hansen–Jagannathan distance measure of model misspecification," Finance Research Letters, Elsevier, vol. 29(C), pages 384-392.
    • Handle: RePEc:eee:finlet:v:29:y:2019:i:c:p:384-392
    DOI: 10.1016/j.frl.2018.09.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Stochastic discount factor; Hansen–Jagannathan distance; Limiting distribution; Lp-norm;
    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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