Duality in Mean-Variance Frontiers with Conditioning Information

55 Pages Posted: 6 Jun 2008

See all articles by Francisco Penaranda

Francisco Penaranda

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Abstract

Portfolio and stochastic discount factor (SDF) frontiers are usually regarded as dual objects, and researchers sometimes use one to answer questions about the other. However, the introduction of conditioning information and active portfolio strategies alters this relationship. For instance, the unconditional portfolio frontier in Hansen and Richard (1987) is not dual to the unconditional SDF frontier in Gallant, Hansen and Tauchen (1990). We characterise the dual objects to those frontiers, and relate them to the frontiers generated with managed portfolios, which are commonly used in empirical work. We also study the implications of a safe asset and other special cases.

Keywords: Asset Pricing, Dynamic Portfolio Strategies, Representing portfolios, Stochastic Discount Factors

JEL Classification: G11, G12

Suggested Citation

Penaranda, Francisco and Sentana, Enrique, Duality in Mean-Variance Frontiers with Conditioning Information. CEPR Discussion Paper No. DP6566. Available at SSRN: https://ssrn.com/abstract=1140093

Francisco Penaranda

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Enrique Sentana (Contact Author)

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

Houghton Street
London School of Economics & Political Science (LSE)
London WC2A 2AE
United Kingdom
+44 20 7955 7002 (Phone)
+44 20 7852 3580 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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