The Exact Distribution of the Hansen-Jagannathan Bound

62 Pages Posted: 21 Dec 2007 Last revised: 1 Apr 2015

See all articles by Raymond Kan

Raymond Kan

University of Toronto - Rotman School of Management

Cesare Robotti

Warwick Business School

Date Written: March 2015

Abstract

Under the assumption of multivariate normality of asset returns, this paper presents a geometric interpretation and the finite-sample distributions of the sample Hansen-Jagannathan bounds on the variance of admissible stochastic discount factors, with and without the nonnegativity constraint on the stochastic discount factors. In addition, since the sample Hansen-Jagannathan bounds can be very volatile, we propose a simple method to construct confidence intervals for the population Hansen-Jagannathan bounds. Finally, we show that the analytical results in the paper are robust to departures from the normality assumption.

Keywords: Hansen-Jagannathan Bound, No Arbitrage, Positivity, Exact Distribution

JEL Classification: G12

Suggested Citation

Kan, Raymond and Robotti, Cesare, The Exact Distribution of the Hansen-Jagannathan Bound (March 2015). Available at SSRN: https://ssrn.com/abstract=1076687 or http://dx.doi.org/10.2139/ssrn.1076687

Raymond Kan (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S3E6
Canada
416-978-4291 (Phone)
416-971-3048 (Fax)

Cesare Robotti

Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

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