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Tests of multifactor pricing models, volatility bounds and portfolio performance

In: Handbook of the Economics of Finance

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  • Ferson, Wayne E.
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    Abstract

    Three concepts: stochastic discount factors, multi-beta pricing and mean-variance efficiency, are at the core of modern empirical asset pricing. This chapter reviews these paradigms and the relations among them, concentrating on conditional asset-pricing models where lagged variables serve as instruments for publicly available information. The different paradigms are associated with different empirical methods. We review the variance bounds of Hansen and Jagannathan (1991), concentrating on extensions for conditioning information. Hansen's (1982) Generalized Method of Moments (GMM) is briefly reviewed as an organizing principle. Then, cross-sectional regression approaches as developed by Fama and MacBeth (1973) are reviewed and used to interpret empirical factors, such as those advocated by Fama and French, 1993 and Fama and French, 1996 . Finally, we review the multivariate regression approach, popularized in the finance literature by Gibbons (1982) and others. A regression approach, with a beta pricing formulation, and a GMM approach with a stochastic discount factor formulation, may be considered competing paradigms for empirical work in asset pricing. This discussion clarifies the relations between the various approaches. Finally, we bring the models and methods together, with a review of the recent conditional performance evaluation literature, concentrating on mutual funds and pension funds.

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    This chapter was published in:

  • G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 2.
    This item is provided by Elsevier in its series Handbook of the Economics of Finance with number 2-12.

    Handle: RePEc:eee:finchp:2-12

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    Cited by:
    1. Christian Gourieroux & Alain Monfort & Razvan Sufana, 2005. "International Money and Stock Market Contingent Claims," Working Papers 2005-41, Centre de Recherche en Economie et Statistique.
    2. Abel, Ernest & Fletcher, Jonathan, 2004. "An empirical examination of UK emerging market unit trust performance," Emerging Markets Review, Elsevier, vol. 5(4), pages 389-408, December.
    3. Fletcher, Jonathan & Kihanda, Joseph, 2005. "An examination of alternative CAPM-based models in UK stock returns," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2995-3014, December.
    4. Chr├ętien, St├ęphane, 2012. "Bounds on the autocorrelation of admissible stochastic discount factors," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1943-1962.
    5. Fletcher, Jonathan, 2014. "Benchmark models of expected returns in U.K. portfolio performance: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 30-46.

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