Factor Representing Portfolios in Large Asset Markets
We study the properties of mimicking portfolios in an intertemporal APT model, in which the conditional mean and covariance matrix of returns vary in an interdependent manner. We use a signal extraction approach, and relate the efficiency of (possibly) dynamic basis portfolios to mean square error minimisation. We prove that many portfolios converge to the factors as the number of assets increases, but show that the conditional Kalman filter portfolios are the ones with both minimum tracking error variability, and maximum correlation with the common factors. We also show that our conclusions are unlikely to change when using parameter estimates.
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|Date of creation:||2000|
|Date of revision:|
|Contact details of provider:|| Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain.|
Web page: http://www.cemfi.es/
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- Chamberlain, Gary, 1983. "Funds, Factors, and Diversification in Arbitrage Pricing Models," Econometrica, Econometric Society, vol. 51(5), pages 1305-23, September.
- repec:crs:wpaper:9107 is not listed on IDEAS
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- Sentana, Enrique & Fiorentini, Gabriele, 2001.
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- Sentana, E. & Fiorentini, G., 1997. "Identification, Estimation and Testing of Conditionally Heteroskedastic Factor Model," Papers 9709, Centro de Estudios Monetarios Y Financieros-.
- Gabriele Fiorentini & Enrique Sentana Iváñez, 1997. "Identification, estimation and testing of conditionally heteroskedastic factor models," Working Papers. Serie AD 1997-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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- Grinblatt, Mark & Titman, Sheridan, 1987. "The Relation between Mean-Variance Efficiency and Arbitrage Pricing," The Journal of Business, University of Chicago Press, vol. 60(1), pages 97-112, January.
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