HANSEN-JAGANNATHAN BOUNDS AS CLASSICAL TESTS OF ASSET-PRICING MODELS

In this article, tests of the implications of consumption-based asset- pricing models are developed. Four of these tests are based on varianc e bounds for intertemporal marginal rates of substitution introduced b y Hansen and Jagannathan. The tests provide one means of quantifying t he effects of sampling error when the bounds are used as a diagnostic device. The tests are used to construct confidence regions for the par ameters of an asset-pricing model using U.S. data. Monte Carlo simulat ion is used to determine the small-sample properties of the tests.