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

Christopher Otrok, B. Ravikumar, Charles H. Whiteman

Research output: Contribution to journalArticle

5 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)149-174
Number of pages26
JournalJournal of Applied Econometrics
Volume17
Issue number2
DOIs
StatePublished - Mar 1 2002

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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