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

Christopher Otrok (), B Ravikumar () and Charles H. Whiteman ()

Journal of Applied Econometrics, 2002, vol. 17, issue 2, pages 149-174

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.

Date: 2002
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Related works:
Working Paper: Evaluating Asset-Pricing Models Using The Hansen-Jagannathan Bound: A Monte Carlo Investigation (2000)
Working Paper: Evaluating Asset-Pricing Models Using The Hansen-Jagannathan Bound: A Monte Carlo Investigation (1999)
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