A new measure of model misspecification with the no-arbitrage constraint: extending the second Hansen–Jagannathan distance

Yuewu Xu ()
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Yuewu Xu: Fordham University

Review of Quantitative Finance and Accounting, 2021, vol. 56, issue 3, No 4, 917-938

Abstract: Abstract This paper proposes a new measure for evaluating asset pricing models with the no-arbitrage constraint which naturally extends the classical (second) distance of Hansen and Jagannathan (J Polit Econ 99(2):225–262, 1991, J Finance 52(2):57–590, 1997). The new measure is designed to capture model misspecifications in terms of arbitrary moments/co-moments in the stochastic discount factors in contrast to the classical Hansen–Jagannathan distance which only uses information contained in the first two moments/co-moments. The new measure $$D_{p}^{+}$$ D p + is defined for any $$1

Keywords: Stochastic discount factor; Hansen–Jagannathan distance; $$L^{p}$$ L p -distance; Higher moments; Skewness and Kurtosis; No-arbitrage (search for similar items in EconPapers)
JEL-codes: C4 C5 G1 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11156-020-00913-w

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