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Duality in Mean-Variance Frontiers with Conditioning Information

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Author Info
Peñaranda, Francisco
Sentana, Enrique

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Abstract

Portfolio and stochastic discount factor (SDF) frontiers are usually regarded as dual objects, and researchers sometimes use one to answer questions about the other. However, the introduction of conditioning information and active portfolio strategies alters this relationship. For instance, the unconditional portfolio frontier in Hansen and Richard (1987) is not dual to the unconditional SDF frontier in Gallant, Hansen and Tauchen (1990). We characterise the dual objects to those frontiers, and relate them to the frontiers generated with managed portfolios, which are commonly used in empirical work. We also study the implications of a safe asset and other special cases.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6566.

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Date of creation: Nov 2007
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Handle: RePEc:cpr:ceprdp:6566

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Related research
Keywords: Asset Pricing; Dynamic Portfolio Strategies; Representing portfolios; Stochastic Discount Factors;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April. [Downloadable!] (restricted)
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  2. Geert Bekaert & Michael S. Urias, 1996. "Diversification, Integration and Emerging Market Closed-End Funds," NBER Working Papers 4990, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. 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. [Downloadable!]
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  4. Abhyankar, Abhay & Basu, Devraj & Stremme, Alexander, 2007. "Portfolio efficiency and discount factor bounds with conditioning information: An empirical study," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 419-437, February. [Downloadable!] (restricted)
  5. Gallant, A. Ronald & Hansen, Lars Peter & Tauchen, George, 1990. "Using conditional moments of asset payoffs to infer the volatility of intertemporal marginal rates of substitution," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 141-179. [Downloadable!] (restricted)
  6. Wayne E. Ferson & Andrew F. Siegel, 2003. "Stochastic Discount Factor Bounds with Conditioning Information," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 16(2), pages 567-595. [Downloadable!] (restricted)
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  7. Bekaert, Geert & Hodrick, Robert J, 1992. " Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 467-509, June. [Downloadable!] (restricted)
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  8. Wayne E. Ferson & Andrew F. Siegel, 2006. "Testing Portfolio Efficiency with Conditioning Information," NBER Working Papers 12098, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Wayne E. Ferson, 2001. "The Efficient Use of Conditioning Information in Portfolios," Journal of Finance, American Finance Association, vol. 56(3), pages 967-982, 06. [Downloadable!] (restricted)
  10. Geert Bekaert, 2004. "Conditioning Information and Variance Bounds on Pricing Kernels," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17(2), pages 339-378. [Downloadable!] (restricted)
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  11. DeRoon, Frans A. & Nijman, Theo E., 2001. "Testing for mean-variance spanning: a survey," Journal of Empirical Finance, Elsevier, vol. 8(2), pages 111-155, May. [Downloadable!] (restricted)
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