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

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Date

1 janvier 2021

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Type de document
Périmètre
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HAL SHS (Sciences de l’Homme et de la Société)

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Archives ouvertes

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Centre pour la communication scientifique directe

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info:eu-repo/semantics/OpenAccess

Mots-clés En

Tradable and nontradable factors Hansen–Jagannathan distance Misspecification errors Factors mimicking portfolios

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Factors Agents, Manufacturers' Manufacturers' representatives Factors

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Xiang Zhang et al., « Tradable or nontradable factors : what does the Hansen–Jagannathan distance tell us? », HAL SHS (Sciences de l’Homme et de la Société), ID : 10670/1.5c8215...

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Résumé En

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.

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