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Evaluation Of Linear Asset Pricing Models By Implied Portfolio Performance

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  • Ronald J. Balvers

    (Division of Economics and Finance, West Virginia University)

  • Dayong Huang

    (Division of Economics and Finance, West Virginia University)

Abstract

We adapt the metric of Kandel and Stambaugh (1995) to evaluate linear asset pricing models. The “KS-ratio” criterion rates a model’s usefulness based on the mean portfolio return a mean-variance decision maker obtains for any variance choice by using the model for optimal portfolio decisions. It is equivalent to a cross-sectional GLS R-square criterion and to a measure of minimum distance between the asset and factor frontiers. We assess the KS-ratio compared to the HJ-distance and ad hoc goodness-of-fit evaluation criteria with simulated returns. We then apply the various criteria to evaluate nine prominent asset pricing models with actual data.

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File URL: http://www.be.wvu.edu/phd_economics/pdf/05-06old2.pdf
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Bibliographic Info

Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 05-06old2 Classification- JEL: G12, C52, G11.

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Length: 46 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wvu:wpaper:05-06old2

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Keywords: Linear Asset Pricing Models; Model Evaluation; Portfolio Performance;

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References

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Citations

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Cited by:
  1. Grauer, Robert R. & Janmaat, Johannus A., 2010. "Cross-sectional tests of the CAPM and Fama-French three-factor model," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(2), pages 457-470, February.
  2. Balvers, Ronald J. & Huang, Dayong, 2007. "Productivity-based asset pricing: Theory and evidence," Journal of Financial Economics, Elsevier, Elsevier, vol. 86(2), pages 405-445, November.
  3. Chou, Pin-Huang & Ho, Po-Hsin & Ko, Kuan-Cheng, 2012. "Do industries matter in explaining stock returns and asset-pricing anomalies?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(2), pages 355-370.
  4. Arouri, Mohamed El Hedi, 2011. "Does crude oil move stock markets in Europe? A sector investigation," Economic Modelling, Elsevier, Elsevier, vol. 28(4), pages 1716-1725, July.
  5. Nieto, Belén & Rubio, Gonzalo, 2011. "The volatility of consumption-based stochastic discount factors and economic cycles," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(9), pages 2197-2216, September.
  6. Gu, Li & Huang, Dayong, 2010. "Sales order backlogs and momentum profits," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(7), pages 1564-1575, July.
  7. Huang, Dayong & Wang, Fang, 2009. "Cash, investments and asset returns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(12), pages 2301-2311, December.
  8. Orbe Mandaluniz, Susan & Ferreira García, María Eva & Gil Bazo, Javier, 2010. "Conditional beta pricing models: A nonparametric approach," BILTOKI, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) 2010-10, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).

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