Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/189402 
Year of Publication: 
2007
Series/Report no.: 
Queen's Economics Department Working Paper No. 1126
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
Abstract: 
Jagannathan and Wang (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.
Subjects: 
Covariance matrix estimation
Factor models
Finite sample properties
Hansen-Jagannathan distance
Shrinkage method
JEL: 
C13
C52
G12
Document Type: 
Working Paper

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