Least Squares Predictions and Mean-Variance Analysis
AbstractWe compare the Sharpe ratios of investment funds which combine one riskless and one risky asset following: i) timing strategies which forecast excess returns using simple regressions; ii) a strategy which uses multiple regression instead; and iii) a passive allocation which combines the funds in i) with constant weightings. We show that iii) dominates i) and ii), as it implicitly uses the linear forecasting rule that maximises the Sharpe ratio of actively traded portfolios, but the relative ranking of i) and ii) is generally unclear. We also discuss under what circumstances the performance of ii) and iii) coincides.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2088.
Date of creation: Feb 1999
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- Enrique Sentana, 2005. "Least Squares Predictions and Mean-Variance Analysis," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(1), pages 56-78.
- Enrique Sentana & Enrique Sentana, 1999. "Least Squares Predictions and Mean-Variance Analysis," FMG Discussion Papers dp312, Financial Markets Group.
- Sentana, E., 1997. "Least Squares Predictions and Mean-Variance Analysis," Papers 9711, Centro de Estudios Monetarios Y Financieros-.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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.:
- Arellano, Manuel, 1989. "On the efficient estimation of simultaneous equations with covariance restrictions," Journal of Econometrics, Elsevier, vol. 42(2), pages 247-265, October.
- Chen, Zhiwu & Knez, Peter J, 1996. "Portfolio Performance Measurement: Theory and Applications," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 511-55.
- Grossman, Sanford J & Stiglitz, Joseph E, 1980.
"On the Impossibility of Informationally Efficient Markets,"
American Economic Review,
American Economic Association, vol. 70(3), pages 393-408, June.
- Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
- Admati, Anat R & Pfleiderer, Paul, 1990. "Direct and Indirect Sale of Information," Econometrica, Econometric Society, vol. 58(4), pages 901-28, July.
- 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.
- Allan Timmermann & Andrew J. Patton, 2004.
"Properties of Optimal Forecasts,"
Econometric Society 2004 North American Winter Meetings
234, Econometric Society.
- Peñaranda, Francisco & Sentana, Enrique, 2004.
"Spanning Tests in Return and Stochastic Discount Factor Mean Variance Frontiers: A Unifying Approach,"
CEPR Discussion Papers
4422, C.E.P.R. Discussion Papers.
- Peñaranda, Francisco & Sentana, Enrique, 2012. "Spanning tests in return and stochastic discount factor mean–variance frontiers: A unifying approach," Journal of Econometrics, Elsevier, vol. 170(2), pages 303-324.
- Francisco Peñaranda & Enrique Sentana, 2004. "Spanning Tests In Return And Stochastic Discount Factor Mean-Variance Frontiers: A Unifying Approach," Working Papers wp2004_0410, CEMFI.
- Francisco Peñaranda & Enrique Sentana, 2008. "Spanning tests in return and stochastic discount factor mean-variance frontiers: A unifying approach," Economics Working Papers 1101, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2010.
- Enrique Sentana & Francisco Penaranda, 2004. "Spanning Tests in Return and Stochastic Discount Factor Mean-Variance Frontiers: A Unifying Approach," FMG Discussion Papers dp497, Financial Markets Group.
- Enrique Sentana, 2009.
"The econometrics of mean-variance efficiency tests: a survey,"
Royal Economic Society, vol. 12(3), pages C65-C101, November.
- Enrique Sentana, 2008. "The Econometrics Of Mean-Variance Efficiency Tests: A Survey," Working Papers wp2008_0807, CEMFI.
- Allan Timmermann & Andrew Patton, 2004.
"Properties of Optimal Forecasts under Asymmetric Loss and Nonlinearity,"
wp04-05, Warwick Business School, Finance Group.
- Patton, Andrew J. & Timmermann, Allan, 2007. "Properties of optimal forecasts under asymmetric loss and nonlinearity," Journal of Econometrics, Elsevier, vol. 140(2), pages 884-918, October.
- Francisco Penaranda, 2007. "Portfolio choice beyond the traditional approach," LSE Research Online Documents on Economics 24481, London School of Economics and Political Science, LSE Library.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.