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Assessing Assets Pricing Anomalies

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  • Brennan, Michael J.
  • Xia, Yihong
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    Abstract

    The optimal portfolio strategy is developed for an investor who has detected an asset pricing anomaly but is not certain that the anomaly is genuine rather than merely apparent. He analysis takes account of the fact that the parameters of both the underlying asset pricing model and the anomalous returns are estimated rather than known. The value that an investor would place on the ability to invest to exploit the apparent anomaly is also derived an illustrative calculations are presented for the Fama and French SMB and HML portfolios, whose returns are anomalous relative to the CAPM.

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    File URL: http://www.escholarship.org/uc/item/3jx02532.pdf;origin=repeccitec
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    Bibliographic Info

    Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt3jx02532.

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    Date of creation: 01 Jan 1999
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    Handle: RePEc:cdl:anderf:qt3jx02532

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Lo, Andrew W & MacKinlay, A Craig, 1990. "Data-Snooping Biases in Tests of Financial Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 431-67.
    2. Yihong Xia, 2001. "Learning about Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation," Journal of Finance, American Finance Association, vol. 56(1), pages 205-246, 02.
    3. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
    4. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    5. Pastor, Lubos & Stambaugh, Robert F., 2000. "Comparing asset pricing models: an investment perspective," Journal of Financial Economics, Elsevier, vol. 56(3), pages 335-381, June.
    6. Detemple, Jerome B., 1991. "Further results on asset pricing with incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 15(3), pages 425-453, July.
    7. Detemple, Jerome B, 1986. " Asset Pricing in a Production Economy with Incomplete Information," Journal of Finance, American Finance Association, vol. 41(2), pages 383-91, June.
    8. Gennotte, Gerard, 1986. " Optimal Portfolio Choice under Incomplete Information," Journal of Finance, American Finance Association, vol. 41(3), pages 733-46, July.
    9. Williams, Joseph T., 1977. "Capital asset prices with heterogeneous beliefs," Journal of Financial Economics, Elsevier, vol. 5(2), pages 219-239, November.
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    Cited by:
    1. Xia, Yihong, 2000. "Learning About Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation," University of California at Los Angeles, Anderson Graduate School of Management qt3167f8mz, Anderson Graduate School of Management, UCLA.

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