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General Tests of Latent Variable Models and Mean Variance Spanning (Reprint 031)

Author

Listed:
  • Wayne E. Ferson
  • Stephen R. Foerster
  • Donald B. Keim

Abstract

The methods of Gibbons and Ferson (1985) are extended, relaxing the assumption that expected returns are linear functions of predetermined instruments. A model of conditional mean variance spanning generalizes Huberman and Kandel (1987). The empirical results indicate that more than a single risk premium is needed to model expected stock and bond returns, but the number of common factors in the expected returns is small. However, when size-biased common stock portfolios proxy for the risk factors, we reject the hypothesis that four of them describe the conditional expected returns of the other assets.

Suggested Citation

  • Wayne E. Ferson & Stephen R. Foerster & Donald B. Keim, "undated". "General Tests of Latent Variable Models and Mean Variance Spanning (Reprint 031)," Rodney L. White Center for Financial Research Working Papers 10-92, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:10-92
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