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The Constrainted Asset Share Estimation (CASE) Method: Testing Mean-Variance Efficiency of the U.S. Stock Market

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  • Engel, Charles
  • Frankel, Jeffrey A.
  • Froot, Kenneth A.
  • Rodrigues, Anthony

Abstract

We apply the method of constrained asset share estimation (CASE) to test the mean-variance efficiency (MVE) of the stock market. This method allows conditional expected returns to vary in relatively unrestricted ways. The data estimate reasonably the price of risk, and, in some cases, the MVE model is valuable in explaining expected equity returns. Unlike with most tests of MVE. we can put an explicit interpretation on the alternative hypothesis -- a general linear Tobin portfolio choice model. We reject the restrictions implied by MVE.

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Bibliographic Info

Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt3xh3d7xn.

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Date of creation: 01 Jan 1990
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Handle: RePEc:cdl:econwp:qt3xh3d7xn

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Keywords: CAPM; stock market; portfolio-balance; mean variance efficiency; Economics; Economic Theory;

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References

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  1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  2. Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May.
  3. Engel, Charles & Rodrigues, Anthony P, 1989. "Tests of International CAPM with Time-Varying Covariances," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(2), pages 119-38, April-Jun.
  4. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
  5. Charles M. Engel & Anthony P. Rodrigues, 1992. "Tests of mean-variance efficiency of international equity markets," Research Paper 9209, Federal Reserve Bank of New York.
  6. Jeffrey A. Frankel & Charles Engel, 1985. "Do Asset-Demand Functions Optimize over the Mean and Variance of Real Returns? A Six-Currency Test," NBER Working Papers 1051, National Bureau of Economic Research, Inc.
  7. Bodurtha, James N, Jr & Mark, Nelson C, 1991. " Testing the CAPM with Time-Varying Risks and Returns," Journal of Finance, American Finance Association, vol. 46(4), pages 1485-1505, September.
  8. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317.
  9. Ferson, Wayne E & Kandel, Shmuel & Stambaugh, Robert F, 1987. " Tests of Asset Pricing with Time-Varying Expected Risk Premiums and Market Betas," Journal of Finance, American Finance Association, vol. 42(2), pages 201-20, June.
  10. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
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Cited by:
  1. Jeffrey A. Frankel, 1994. "The Internationalization of Equity Markets," NBER Books, National Bureau of Economic Research, Inc, number fran94-1.
  2. Glassman, Debra A. & Riddick, Leigh A., 1996. "Why empirical international portfolio models fail: evidence that model misspecification creates home asset bias," Journal of International Money and Finance, Elsevier, vol. 15(2), pages 275-312, April.
  3. Bernard Dumas, 1993. "Partial- Vs. General-Equilibrium Models of the International Capital Market," NBER Working Papers 4446, National Bureau of Economic Research, Inc.

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