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

in International Review of Economics & Finance, 71

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

Voir la revue «International Review of Economics and Finance»

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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