Chi-squared tests for evaluation and comparison of asset pricing models

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 misspecified. We propose modified versions of the existing model selection tests and new pivotal specification and model comparison tests with improved finite-sample properties. In addition, we provide formal tests of multiple model comparison. The excellent size and power properties of the proposed tests are demonstrated using simulated data from linear and nonlinear asset pricing models.