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Portfolio efficiency and discount factor bounds with conditioning information: an empirical study

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Abhyankar, Abhay, Basu, Devraj and Stremme, Alexander (2007) Portfolio efficiency and discount factor bounds with conditioning information: an empirical study. Journal of Banking & Finance, Vol.31 (No.2). pp. 419-437. doi:10.1016/j.jbankfin.2006.06.016

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Official URL: http://dx.doi.org/10.1016/j.jbankfin.2006.06.016

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Abstract

Stochastic discount factor bounds provide a useful diagnostic too] for testing asset pricing models by specifying a lower bound on the variance of any admissible discount factor. In this paper, we provide a unified derivation of such bounds in the presence of conditioning information, which allows us to compare their theoretical and empirical properties. We find that, while the location of the 'unconditionally efficient (UE)' bounds of [Ferson, W., Siegel, A., 2001. The efficient use of conditioning information in portfolios. Journal of Finance 56 (3), 967-982] is statistically indistinguishable from the (theoretically) optimal bounds of [Gallant, R., Hansen, L., Tauchen, G., 1990. Using conditional moments of asset payoffs to infer the volatility of intertemporal marginal rates of substitution. Journal of Econometrics 45 (1), 141-179] (GHT), the former exhibit better sampling properties. We demonstrate that the difference in sampling variability of the UE and GHT bounds is due to the different behavior of the efficient return weights underlying their construction. (c) 2006 Elsevier B.V. All rights reserved.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
H Social Sciences > HC Economic History and Conditions
Divisions: Faculty of Social Sciences > Warwick Business School
Journal or Publication Title: Journal of Banking & Finance
Publisher: Elsevier Science BV
ISSN: 0378-4266
Official Date: February 2007
Dates:
DateEvent
February 2007Published
Volume: Vol.31
Number: No.2
Number of Pages: 19
Page Range: pp. 419-437
DOI: 10.1016/j.jbankfin.2006.06.016
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

Data sourced from Thomson Reuters' Web of Knowledge

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