Mimicking Portfolios, Economic Risk Premia, and Tests of Multi-Beta Models

54 Pages Posted: 8 Dec 2007

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Cesare Robotti

Warwick Business School

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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 study the small-sample properties of estimates and test statistics. We conclude that the LFM* formulation should be considered in addition to, or even instead of, the more traditional LFM formulation.

JEL Classification: G12

Suggested Citation

Balduzzi, Pierluigi and Robotti, Cesare, Mimicking Portfolios, Economic Risk Premia, and Tests of Multi-Beta Models. Journal of Business and Economic Statistics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1067050

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
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Cesare Robotti

Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

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