The Exact Distribution of the Hansen-Jagannathan Bound
62 Pages Posted: 21 Dec 2007 Last revised: 1 Apr 2015
Date Written: March 2015
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: Suggested Citation