Tradable or nontradable factors—what does the Hansen–Jagannathan distance tell us?

Autor: Kun Wu, Xiang Zhang, Bertrand Maillet, Yangyi Liu
Přispěvatelé: Southwestern University of Finance and Economics [Chengdu, China], emlyon business school
Jazyk: angličtina
Rok vydání: 2021
Předmět:
Zdroj: International Review of Economics and Finance
International Review of Economics and Finance, Elsevier, 2021, 71, pp.853-879. ⟨10.1016/j.iref.2020.10.013⟩
ISSN: 1059-0560
DOI: 10.1016/j.iref.2020.10.013⟩
Popis: We investigate the difference in pricing cross-sectional risky assets performance between tradable and nontradable factors by comparing their misspecification errors—the Hansen–Jagannathan (HJ) distance. By constructing nontradable factors mimicking portfolios (FMPs) and incorporating them into the least-misspecified tradable stochastic dis-count factor (SDF), we provide cross-country empirical evidence that this SDF that combines tradable and nontradable factors dominates others in which nontradable factors further decrease the SDF’s mis-specification errors. Since nontradable FMPs are functions of current tradable factor information about the economic state, FMPs “hedge” the state variable risks, and FMPs’ returns describe the risk premiums.
Databáze: OpenAIRE
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