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

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

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 University of California at Berkeley in its series Economics Working Papers with number 90-134.

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Date of creation: 01 Jan 1990
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Handle: RePEc:ucb:calbwp:90-134

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Postal: University of California at Berkeley, Berkeley, CA USA
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Web page: http://www.haas.berkeley.edu/groups/iber/wps/econwp.html
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References

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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  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. Engel, Charles M & Rodrigues, Anthony P, 1993. "Tests of Mean-Variance Efficiency of International Equity Markets," Oxford Economic Papers, Oxford University Press, vol. 45(3), pages 403-21, July.
  8. 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.
  9. 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.
  10. 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.
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Cited by:
  1. Bernard Dumas, 1993. "Partial- Vs. General-Equilibrium Models of the International Capital Market," NBER Working Papers 4446, National Bureau of Economic Research, Inc.
  2. Jeffrey A. Frankel, 1994. "The Internationalization of Equity Markets," NBER Books, National Bureau of Economic Research, Inc, number fran94-1.

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