Analytical Solution for the Constrained Hansen-Jagannathan Distance Under Multivariate Ellipticity

34 Pages Posted: 22 Mar 2015

See all articles by Nikolay Gospodinov

Nikolay Gospodinov

Federal Reserve Bank of Atlanta

Raymond Kan

University of Toronto - Rotman School of Management

Cesare Robotti

Warwick Business School

Date Written: November 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 approach allows us to analyze the benefits and costs of using the HJ-distance with a no-arbitrage constraint to rank asset pricing models.

Keywords: Hansen-Jagannathan distance, no-arbitrage, model ranking, multivariate elliptical distributions

JEL Classification: G12

Suggested Citation

Gospodinov, Nikolay and Kan, Raymond and Robotti, Cesare, Analytical Solution for the Constrained Hansen-Jagannathan Distance Under Multivariate Ellipticity (November 2012). FRB Atlanta Working Paper No. 2012-18; Rotman School of Management Working Paper No. 2479458. Available at SSRN: https://ssrn.com/abstract=2479458 or http://dx.doi.org/10.2139/ssrn.2479458

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

Raymond Kan

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)

Cesare Robotti (Contact Author)

Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

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