Analytical Solution for the Constrained Hansen-Jagannathan Distance Under Multivariate Ellipticity
34 Pages Posted: 22 Mar 2015
Date Written: November 2012
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
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