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Evaluating asset-pricing models using the Hansen–Jagannathan bound: a Monte Carlo investigation

✍ Scribed by Christopher Otrok; B. Ravikumar; Charles H. Whiteman

Publisher: John Wiley and Sons
Year: 2002
Tongue: English
Weight: 222 KB
Volume: 17
Category: Article
ISSN: 0883-7252
DOI: 10.1002/jae.640

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✦ Synopsis

Abstract

We use recent statistical tests, based on a ‘distance’ between the model and the Hansen–Jagannathan bound, to compute the rejection rates of true models. For asset‐pricing models with time‐separable preferences, the finite‐sample distribution of the test statistic associated with the risk‐neutral case is extreme, in the sense that critical values based on this distribution deliver type I errors no larger than intended—regardless of risk aversion or the rate of time preference. We also show that these maximal‐type‐I‐error critical values are appropriate for both time and state non‐separable preferences and that they yield acceptably small type II error rates. Copyright © 2002 John Wiley & Sons, Ltd.

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