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Evaluation Of Linear Asset Pricing Models By Implied Portfolio Performance

  • Ronald J. Balvers

    (Division of Economics and Finance, West Virginia University)

  • Dayong Huang

    (Division of Economics and Finance, West Virginia University)

We adapt the metric of Kandel and Stambaugh (1995) to evaluate linear asset pricing models. The “KS-ratio” criterion rates a model’s usefulness based on the mean portfolio return a mean-variance decision maker obtains for any variance choice by using the model for optimal portfolio decisions. It is equivalent to a cross-sectional GLS R-square criterion and to a measure of minimum distance between the asset and factor frontiers. We assess the KS-ratio compared to the HJ-distance and ad hoc goodness-of-fit evaluation criteria with simulated returns. We then apply the various criteria to evaluate nine prominent asset pricing models with actual data.

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File URL: http://www.be.wvu.edu/phd_economics/pdf/05-06old2.pdf
File Function: First version, 2005
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Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 05-06old2 Classification- JEL: G12, C52, G11.

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Length: 46 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wvu:wpaper:05-06old2
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Web page: http://www.be.wvu.edu/phd_economics/
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