Asset Pricing Models: Implications for Expected Returns and Portfolio Selection / A. Craig MacKinlay, Lubos Pastor.

Format:

Book

Author/Creator:

MacKinlay, A. Craig.

Contributor:

National Bureau of Economic Research.

Pastor, Lubos.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7162.

NBER working paper series no. w7162

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Asset Pricing Models

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Summary:

Implications of factor-based asset pricing models for estimation of expected returns and for portfolio selection are investigated. In the presence of model mispricing due to a missing risk factor, the mispricing and the residual covariance matrix are linked together. Imposing a strong form of this link leads to expected return estimates that are more precise and more stable over time than unrestricted estimates. Optimal portfolio weights that incorporate the link when no factors are observable are proportional to expected return estimates, effectively using an identity matrix as a covariance matrix. The resulting portfolios perform well both in simulations and in out-of-sample comparisons.

Notes:

Print version record

June 1999.