Comparing Asset Pricing Models by the Conditional Hansen-Jagannathan Distance

77 Pages Posted: 6 Oct 2015

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: May 1, 2015

Abstract

We compare non-nested parametric specifications of the Stochastic Discount Factor (SDF) in terms of their conditional Hansen-Jagannathan (HJ-) distance. This distance is defined as the discrepancy between a parametric SDF family identifying an asset pricing model and the set of admissible SDF's satisfying the conditional no-arbitrage restrictions for a set of traded assets. The conditional HJ-distance accounts for the models' ability to match the dynamic pricing restrictions for any set of managed portfolios, and not just a set of static restrictions for a specific choice of instruments like the often employed (unconditional) HJ-distance. We estimate the conditional HJ-distance by a kernel-based Generalized Method of Moments estimator and establish its large sample properties for model selection purposes. We demonstrate empirically the usefulness of our approach by comparing several SDF models including preference-based specifications, beta-pricing models and recently proposed SDF models that are conditionally linear in the priced risk factors.

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

Suggested Citation

Gagliardini, Patrick and Ronchetti, Diego, Comparing Asset Pricing Models by the Conditional Hansen-Jagannathan Distance (May 1, 2015). Available at SSRN: https://ssrn.com/abstract=2669464 or http://dx.doi.org/10.2139/ssrn.2669464

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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