This paper is concerned with statistical inference and model evaluation in possibly misspecified and unidentified linear asset-pricing models estimated by maximum likelihood and one-step generalized method of moments. Strikingly, when spurious factors (that is, factors that are uncorrelated with...

This paper studies some seemingly anomalous results that arise in possibly misspecified and unidentified linear asset-pricing models estimated by maximum likelihood and one-step generalized method of moments (GMM). Strikingly, when useless factors (that is, factors that are independent of the...

We provide an in-depth analysis of the theoretical and statistical properties of the Hansen-Jagannathan (HJ) distance that incorporates a no-arbitrage constraint. We show that for stochastic discount factors (SDF) that are spanned by the returns on the test assets, testing the equality of HJ...

We provide an in-depth analysis of the theoretical properties of the Hansen-Jagannathan (HJ) distance that incorporates a no-arbitrage constraint. Under a multivariate elliptical distribution assumption, we present explicit expressions for the HJ-distance with a no-arbitrage constraint, the...

We derive new results on the asymptotic behavior of the estimated parameters of a linear asset pricing model and their associated t-statistics in the presence of a factor that is independent of the returns. The inclusion of this "useless" factor in the model leads to a violation of the full rank...

This paper presents a general statistical framework for estimation, testing, and comparison of asset pricing models using the unconstrained distance measure of Hansen and Jagannathan (1997). The limiting results cover both linear and nonlinear models that could be correctly specified or...

We show that in misspecified models with useless factors (for example, factors that are independent of the returns on the test assets), the standard inference procedures tend to erroneously conclude, with high probability, that these irrelevant factors are priced and the restrictions of the...

We discuss the impact of different formulations of asset pricing models on the outcome of specification tests that are performed using excess returns. It is generally believed that when only excess returns are used for testing asset pricing models, the mean of the stochastic discount factor...

Mimicking portfolios for factors are often used in asset pricing studies. Current practice has generally ignored the impact of estimation errors on the weights of the mimicking portfolios. We show that such a practice can lead to gross understatement of the standard errors of the estimated risk...

For many multi-factor asset pricing models proposed in the recent literature, their implied tang-ency portfolios have substantially higher sample Sharpe ratios than that of the value-weighted market portfolio. In contrast, such high sample Sharpe ratio is rarely delivered by professional fund...