Improvement in Finite Sample Properties of the Hansen-Jagannathan Distance Test

Yu Ren and Katsumi Shimotsu

No 273602, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: Jagannathan andWang (1996) derive the asymptotic distribution of the Hansen-Jagannathan distance (HJ-distance) proposed by Hansen and Jagannathan (1997), and develop a specification test of asset pricing models based on the HJ-distance. While the HJ-distance has several desirable properties, Ahn and Gadarowski (2004) find that the specification test based on the HJ-distance overrejects correct models too severely in commonly used sample size to provide a valid test. This paper proposes to improve the finite sample properties of the HJ-distance test by applying the shrinkage method (Ledoit and Wolf, 2003) to compute its weighting matrix. The proposed method improves the finite sample performance of the HJ-distance test significantly.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 40
Date: 2007-06
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Related works:
Journal Article: Improvement in finite sample properties of the Hansen-Jagannathan distance test (2009)
Working Paper: Improvement In Finite Sample Properties Of The Hansen-jagannathan Distance Test (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:273602

DOI: 10.22004/ag.econ.273602

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