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Duality in mean-variance frontiers with conditioning information

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  • Francisco Peñaranda
  • Enrique Sentana

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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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1058.

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Date of creation: Oct 2007
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Handle: RePEc:upf:upfgen:1058

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Web page: http://www.econ.upf.edu/

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

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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Wayne E. Ferson & Andrew F. Siegel, 2003. "Stochastic Discount Factor Bounds with Conditioning Information," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 567-595.
  6. Bekaert, Geert & Urias, Michael S, 1996. " Diversification, Integration and Emerging Market Closed-End Funds," Journal of Finance, American Finance Association, vol. 51(3), pages 835-69, July.
  7. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
  8. 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.
  9. Wayne E. Ferson & Andrew F. Siegel, 2006. "Testing Portfolio Efficiency with Conditioning Information," NBER Working Papers 12098, National Bureau of Economic Research, Inc.
  10. Chamberlain, Gary & Rothschild, Michael, 1982. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Scholarly Articles 3230355, Harvard University Department of Economics.
  11. 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.
  12. Geert Bekaert, 2004. "Conditioning Information and Variance Bounds on Pricing Kernels," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 339-378.
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Cited by:
  1. Francisco Peñaranda, 2009. "Understanding portfolio efficiency with conditioning information," Economics Working Papers 1146, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2011.
  2. Rafael Repullo & David Martínez-Miera, 2008. "Does Competition Reduce The Risk Of Bank Failure?," Working Papers wp2008_0801, CEMFI.

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