TY - JOUR
T1 - Small sample properties of the GMM specification test based on the Hansen-Jagannathan distance
AU - Ahn, Seung
AU - Gadarowski, Christopher
N1 - Funding Information:
The first author gratefully acknowledges the financial support of the College of Business and Dean's Council of 100 at Arizona State University, the Economic Club of Phoenix, and the alumni of the College of Business. For their comments in the development of this paper, we gratefully acknowledge seminar participants at Arizona State University, especially Hank Bessembinder, John Griffin and Mike Lemmon, as well as the anonymous referee on the paper. All remaining errors are our own.
PY - 2004/1
Y1 - 2004/1
N2 - Following Hansen and Jagannathan (J. Finance 52 (1997) 557), Jagannathan and Wang (J. Finance 51 (1996) 3) propose a distance measure that estimates the maximum pricing error generated by a linear asset model. Jagannathan and Wang propose a test of this HJ-distance using an empirical p-value as an alternative generalized method of moments (GMM) measure to Hansen's (Econometrica 50 (1982) 1029) GMM specification test. Using Monte Carlo analysis, we examine the finite sample properties of these specification tests. While the Hansen test mildly overrejects correct models in commonly used sample size, the empirical p-value of the HJ-distance rejects correct models too severely in such samples to provide a valid test of such models.
AB - Following Hansen and Jagannathan (J. Finance 52 (1997) 557), Jagannathan and Wang (J. Finance 51 (1996) 3) propose a distance measure that estimates the maximum pricing error generated by a linear asset model. Jagannathan and Wang propose a test of this HJ-distance using an empirical p-value as an alternative generalized method of moments (GMM) measure to Hansen's (Econometrica 50 (1982) 1029) GMM specification test. Using Monte Carlo analysis, we examine the finite sample properties of these specification tests. While the Hansen test mildly overrejects correct models in commonly used sample size, the empirical p-value of the HJ-distance rejects correct models too severely in such samples to provide a valid test of such models.
KW - Empirical p-value
KW - Finite sample properties
KW - Generalized method of moments
KW - Hansen-Jagannathan distance
KW - Pricing error
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U2 - 10.1016/j.jempfin.2002.09.001
DO - 10.1016/j.jempfin.2002.09.001
M3 - Article
AN - SCOPUS:0348159711
SN - 0927-5398
VL - 11
SP - 109
EP - 132
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
IS - 1
ER -