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Comparing Asset Pricing Models: An Investment Perspective

  • Lubos Pastor
  • Robert F. Stambaugh

We investigate the portfolio choices of mean-variance-optimizing investors who use sample evidence to update prior beliefs centered on either risk-based or characteristic-based pricing models. With dogmatic beliefs in such models and an unconstrained ratio of position size to capital, optimal portfolios can differ across models to economically significant degrees. The differences are substantially reduced by modest uncertainty about the models' pricing abilities. When the ratio of position size to capital is subject to realistic constraints, the differences in portfolios across models become even less important, nonexistent in some cases.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7284.

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Date of creation: Aug 1999
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Publication status: published as Journal of Financial Economics, Vol. 56 (2000): 335-381.
Handle: RePEc:nbr:nberwo:7284
Note: AP
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  1. Wang, Zhenyu, 1998. "Efficiency loss and constraints on portfolio holdings," Journal of Financial Economics, Elsevier, vol. 48(3), pages 359-375, June.
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  8. Lubos Pastor & Robert F. Stambaugh, 1998. "Costs of Equity Capital and Model Mispricing," NBER Working Papers 6490, National Bureau of Economic Research, Inc.
  9. Shmuel Kandel & Robert F. Stambaugh, 1995. "On the Predictability of Stock Returns: An Asset-Allocation Perspective," NBER Working Papers 4997, National Bureau of Economic Research, Inc.
  10. Huberman, Gur & Kandel, Shmuel & Stambaugh, Robert F, 1987. " Mimicking Portfolios and Exact Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 42(1), pages 1-9, March.
  11. MacKinlay, A. Craig, 1995. "Multifactor models do not explain deviations from the CAPM," Journal of Financial Economics, Elsevier, vol. 38(1), pages 3-28, May.
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