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Mimicking Portfolios, Economic Risk Premia, and Tests of Multi-Beta ModelsCesare RobottiFederal Reserve Bank of Atlanta; EDHEC Risk Institute Pierluigi BalduzziBoston College - Carroll School of Management January 2005 AFA 2006 Boston Meetings Paper Abstract: We consider two formulations of the linear factor model with non-traded factors. In the first formulation (LFM), risk premia and alphas are estimated by a cross-sectional regression of average returns on betas. In the second formulation (LFM*), the factors are replaced by their projections on the span of excess returns, and risk premia and alphas are estimated by time-series regressions. We compare the two formulations and we study the small-sample properties of estimates and test statistics. We conclude that the LFM* formulation should be considered in addition, or even instead, of the more traditional LFM formulation.
Keywords: Mimicking Portfolios, Economic Risk Premia, Multi-Beta Models JEL Classification: G12 working papers seriesDate posted: March 25, 2005Suggested CitationContact Information
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