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

in International Review of Economics & Finance, 71

par Zhang, Xiang ; Liu, Yangyi ; Wu, Kun ; Maillet, Bertrand (19..-....)

2021 - 853-879 p. | En anglais

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.

Voir la revue «International Review of Economics and Finance»

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