On the Hansen-Jagannathan Distance with a No-Arbitrage Constraint

53 Pages Posted: 13 Jan 2010 Last revised: 5 Jul 2014

See all articles by Nikolay Gospodinov

Nikolay Gospodinov

Federal Reserve Bank of Atlanta

Cesare Robotti

Warwick Business School

Raymond Kan

University of Toronto - Rotman School of Management

Date Written: March 28, 2012

Abstract

We provide an in-depth analysis of the theoretical properties of the Hansen-Jagannathan (HJ) distance that incorporates a no-arbitrage constraint. Under a multivariate elliptical distribution assumption, we present explicit expressions for the HJ-distance with a no-arbitrage constraint, the associated Lagrange multipliers, and the SDF parameters in the case of linear SDFs. This allows us to analyze the benefits and costs of using the HJ-distance with a no-arbitrage constraint to rank models. Finally, we demonstrate the practical relevance of our theoretical findings in an empirical illustration of some popular asset pricing models.

Keywords: Hansen-Jagannthan distrance, no-arbitrage constraint, model comparison

JEL Classification: G12, C12, C13

Suggested Citation

Gospodinov, Nikolay and Robotti, Cesare and Kan, Raymond, On the Hansen-Jagannathan Distance with a No-Arbitrage Constraint (March 28, 2012). Available at SSRN: https://ssrn.com/abstract=1534727 or http://dx.doi.org/10.2139/ssrn.1534727

Nikolay Gospodinov

Federal Reserve Bank of Atlanta ( email )

Atlanta, GA 30309
United States

HOME PAGE: https://www.frbatlanta.org/research/economists/gospodinov-nikolay.aspx?panel=1

Cesare Robotti

Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

Raymond Kan (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-4291 (Phone)
416-971-3048 (Fax)

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