Abstract
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.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 109-132 |
| Number of pages | 24 |
| Journal | Journal of Empirical Finance |
| Volume | 11 |
| Issue number | 1 |
| DOIs | |
| State | Published - Jan 2004 |
Fingerprint
Keywords
- Empirical p-value
- Finite sample properties
- Generalized method of moments
- Hansen-Jagannathan distance
- Pricing error
ASJC Scopus subject areas
- Economics and Econometrics
- Finance
Cite this
Small sample properties of the GMM specification test based on the Hansen-Jagannathan distance. / Ahn, Seung; Gadarowski, Christopher.
In: Journal of Empirical Finance, Vol. 11, No. 1, 01.2004, p. 109-132.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Small sample properties of the GMM specification test based on the Hansen-Jagannathan distance
AU - Ahn, Seung
AU - Gadarowski, Christopher
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
UR - http://www.scopus.com/inward/record.url?scp=0348159711&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=0348159711&partnerID=8YFLogxK
U2 - 10.1016/j.jempfin.2002.09.001
DO - 10.1016/j.jempfin.2002.09.001
M3 - Article
AN - SCOPUS:0348159711
VL - 11
SP - 109
EP - 132
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
SN - 0927-5398
IS - 1
ER -