Testing Portfolio Efficiency with Conditioning Information

Posted: 22 Jun 2009

See all articles by Wayne E. Ferson

Wayne E. Ferson

University of Southern California; National Bureau of Economic Research (NBER)

Andrew F. Siegel

University of Washington - Department of Finance and Business Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2009

Abstract

We develop asset pricing models’ implications for portfolio efficiency with conditioning information in the form of lagged instruments. A model identifies a portfolio that should be minimum-variance efficient with respect to the conditioning information. Our framework refines tests of portfolio efficiency by using the given conditioning information optimally. The optimal use of the lagged variables is economically important; by using the instruments optimally, we reject several efficiency hypotheses that are not otherwise rejected. The Sharpe ratios of a sample of hedge fund indexes appear consistent with the optimal use of conditioning information.

Keywords: G11, G12, G23

Suggested Citation

Ferson, Wayne E. and Siegel, Andrew F., Testing Portfolio Efficiency with Conditioning Information (July 2009). The Review of Financial Studies, Vol. 22, Issue 7, pp. 2535-2558, 2009, Available at SSRN: https://ssrn.com/abstract=1422411 or http://dx.doi.org/hhn112

Wayne E. Ferson (Contact Author)

University of Southern California ( email )

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HOME PAGE: http://www-rcf.usc.edu/~ferson/

National Bureau of Economic Research (NBER)

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Andrew F. Siegel

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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