Comparing Asset Pricing Models by the Conditional Hansen-Jagannathan Distance

60 Pages Posted: 17 Feb 2015 Last revised: 25 Jul 2018

See all articles by Patrick Gagliardini

Patrick Gagliardini

USI Università della Svizzera italiana; Swiss Finance Institute

Diego Ronchetti

University of Groningen - SOM Research School

Date Written: March 2018

Abstract

We compare non-nested parametric specifications of the Stochastic Discount Factor (SDF) using the conditional Hansen-Jagannathan (HJ-) distance. This distance measures the discrepancy between a parametric model-implied SDF and the admissible SDF's satisfying all the conditional (dynamic) no-arbitrage restrictions, instead of just few unconditional no-arbitrage restrictions for managed portfolios chosen through the instrument selection. We estimate the conditional HJ-distance by a Generalized Method of Moments estimator and establish its large sample properties for model selection purposes. We compare empirically several SDF models including multifactor beta pricing specifications and some recently proposed SDF models that are conditionally linear in consumption growth.

Keywords: Asset pricing model comparison, stochastic discount factor, Hansen-Jagannathan distance, Generalized Method of Moments, conditional moment restrictions, nonparametric estimation

JEL Classification: C12, C14, G12

Suggested Citation

Gagliardini, Patrick and Ronchetti, Diego, Comparing Asset Pricing Models by the Conditional Hansen-Jagannathan Distance (March 2018). Available at SSRN: https://ssrn.com/abstract=2565538 or http://dx.doi.org/10.2139/ssrn.2565538

Patrick Gagliardini

USI Università della Svizzera italiana ( email )

Via Buffi 13
Lugano, TN 6900
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Diego Ronchetti (Contact Author)

University of Groningen - SOM Research School ( email )

P.O. Box 800
9700 AV Groningen
Netherlands
+31 50 363 3460 (Phone)
+31 50 363 7337 (Fax)

HOME PAGE: http://www.rug.nl/staff/d.ronchetti/

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