Working Paper: NBER ID: w8789
Authors: Wayne E. Ferson; Andrew F. Siegel
Abstract: Hansen and Jagannathan (HJ, 1991) describe restrictions on the volatility of stochastic discount factors (SDFs) that price a given set of asset returns. This paper compares the sampling properties of different versions of HJ bounds that use conditioning information in the form of a given set of lagged instruments. HJ describe one way to use conditioning information. Their approach is to multiply the original returns by the lagged variables, and much of the asset pricing literature to date has followed this ihmultiplicativel. approach. We also study two versions of optimized HJ bounds with conditioning information. One is from Gallant, Hansen and Tauchen (1990) and the second is based on the unconditionally-efficient portfolios derived in Ferson and Siegel (2000). We document finite-sample biases in the HJ bounds, where the biased bounds reject asset-pricing models too often. We provide useful correction factors for the bias. We also evaluate the asymptotic standard errors for the HJ bounds, from Hansen, Heaton and Luttmer (1995).
Keywords: No keywords provided
JEL Codes: G12; C31; D51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stochastic discount factors (SDFs) (D15) | asset returns (G19) |
| conditioning information (D83) | Hansen-Jagannathan (HJ) bounds (C51) |
| lagged variables z_{t-1} (C29) | Hansen-Jagannathan (HJ) bounds (C51) |
| method of conditioning (C90) | validity of asset pricing models (G19) |
| efficient portfolio bounds (G11) | maximum unconditional Sharpe ratios (G19) |
| multiplicative approach (C59) | finite-sample biases in HJ bounds (C51) |
| adjustments (F32) | biases in bounds (C46) |