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Duality in mean-variance frontiers with conditioning information

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  • Peñaranda, Francisco
  • Sentana, Enrique

Abstract

Portfolio and stochastic discount factor mean-variance frontiers are usually regarded as dual objects. However, the Hansen and Richard (1987) and Gallant, Hansen and Tauchen (1990) unconditional frontiers are not dual unless some strong conditions hold. We characterise the objects that are always dual to those frontiers, which are not generally proper SDFs or returns. We avoid the common practice of parametrically specifying conditional moments of returns, estimating instead the frontiers with easily implementable sieve methods, which have a managed portfolio interpretation. We empirically assess the validity of SDFs with constant risk prices and the relevance of predictability for portfolio choice.

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  • Peñaranda, Francisco & Sentana, Enrique, 2016. "Duality in mean-variance frontiers with conditioning information," Journal of Empirical Finance, Elsevier, vol. 38(PB), pages 762-785.
    • Handle: RePEc:eee:empfin:v:38:y:2016:i:pb:p:762-785
    DOI: 10.1016/j.jempfin.2016.03.008
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    3. David Martinez-Miera & Rafael Repullo, 2010. "Does Competition Reduce the Risk of Bank Failure?," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3638-3664, October.
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    7. Marie-Claude Beaulieu & Jean-Marie Dufour & Lynda Khalaf, 2020. "Arbitrage Pricing, Weak Beta, Strong Beta: Identification-Robust and Simultaneous Inference," Cahiers de recherche 15-2020, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    8. Vigo Pereira, Caio, 2021. "Portfolio efficiency with high-dimensional data as conditioning information," International Review of Financial Analysis, Elsevier, vol. 77(C).

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    More about this item

    Keywords

    Asset pricing; Conditional moment restrictions; Dynamic portfolio strategies; Representing portfolios; Sieve minimum distance; Stochastic discount factors;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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