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Comparing Asset Pricing Models: An Investment Perspective

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  • Lubos Pastor
  • Robert F. Stambaugh

Abstract

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.

Suggested Citation

  • Lubos Pastor & Robert F. Stambaugh, 1999. "Comparing Asset Pricing Models: An Investment Perspective," NBER Working Papers 7284, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:7284
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    References listed on IDEAS

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    More about this item

    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

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