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Is the Market Portfolio Efficient? A New Test to Revisit the Roll (1977) versus Levy and Roll (2010) Controversy

Author

Listed:
  • Marie Brière
  • Bastien Drut
  • Valérie Mignon
  • Kim Oosterlinck
  • Ariane Szafarz

Abstract

Levy and Roll (Review of Financial Studies, 2010) have recently revived the debate related to the market portfolio's efficiency suggesting that it may be mean-variance efficient after all. This paper develops an alternative test of portfolio mean-variance efficiency based on the realistic assumption that all assets are risky. The test is based on the vertical distance of a portfolio from the efficient frontier. Monte Carlo simulations show that our test outperforms the previous mean-variance efficiency tests for large samples since it produces smaller size distortions for comparable power. Our empirical application to the US equity market highlights that the market portfolio is not mean-variance efficient, and so invalidates the zerobeta CAPM.

Suggested Citation

  • Marie Brière & Bastien Drut & Valérie Mignon & Kim Oosterlinck & Ariane Szafarz, 2011. "Is the Market Portfolio Efficient? A New Test to Revisit the Roll (1977) versus Levy and Roll (2010) Controversy," EconomiX Working Papers 2011-20, University of Paris Nanterre, EconomiX.
  • Handle: RePEc:drm:wpaper:2011-20
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    Keywords

    Efficient portfolio; mean-variance efficiency; efficiency test.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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