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A conditional asset-pricing model with the optimal orthogonal portfolio

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  • Asgharian, Hossein

Abstract

This paper employs a conditional asset-pricing model based on the optimal orthogonal portfolio approach to construct a factor portfolio that embodies all the latent factors important for pricing a given set of test assets. The advantage of this portfolio to the anomaly related mimicking portfolios is its ability to separate out the components of average return that are not related to the return covariation. The performance of this portfolio is evaluated against several conventional factors, using both cross-sectional and time-series regression approaches, as well as the Hansen and Jagannathan (1997) distance measure. Its strong out-of-sample results indicate that our suggested methodology may have important applications in risk management, portfolio selection and performance evaluation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 5 (May)
Pages: 1027-1040

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:5:p:1027-1040

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Optimal orthogonal portfolio Factor pricing Time-varying risk premium;

References

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  1. Asgharian, Hossein & Hansson, Bjorn, 2005. "Evaluating the importance of missing risk factors using the optimal orthogonal portfolio approach," Journal of Empirical Finance, Elsevier, vol. 12(4), pages 556-575, September.
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  4. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing Specification Errors in Stochastic Discount Factor Models," NBER Technical Working Papers 0153, National Bureau of Economic Research, Inc.
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Cited by:
  1. Haven, Emmanuel & Liu, Xiaoquan & Shen, Liya, 2012. "De-noising option prices with the wavelet method," European Journal of Operational Research, Elsevier, vol. 222(1), pages 104-112.

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