Conditional Mean-Variance Efficiency of the U.S. Stock Market
26 Pages Posted: 29 Nov 2001 Last revised: 15 Dec 2008
Date Written: March 1989
Abstract
We apply the method of constrained asset share estimation (CASE) to test the mean-variance efficiency (MVE) of the stock market. This method allows conditional expected returns to vary in unrestricted ways, given investor preferences. We also allow conditional variances to follow an ARCH process. The data estimate reasonably the coefficient of relative risk aversion, though are unable to reject investor risk neutrality. We reject the restrictions implied by MVE, although changing conditional variances improve statistically upon measured market efficiency. We find that unrestricted asset-share and ARCH models help forecast excess returns. Once MVE is imposed, however, this forecasting ability disappears.
Suggested Citation: Suggested Citation
Register to save articles to
your library
Recommended Papers
-
Time-Varying World Market Integration
By Geert Bekaert and Campbell R. Harvey
-
Time-Varying World Market Integration
By Geert Bekaert and Campbell R. Harvey
-
Foreign Speculators and Emerging Equity Markets
By Geert Bekaert and Campbell R. Harvey
-
Foreign Speculators and Emerging Equity Markets
By Geert Bekaert and Campbell R. Harvey
-
The World Price of Foreign Exchange Risk
By Bernard Dumas and Bruno Solnik
-
Emerging Equity Market Volatility
By Geert Bekaert and Campbell R. Harvey
-
Emerging Equity Market Volatility
By Geert Bekaert and Campbell R. Harvey
-
Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets
By Geert Bekaert and Robert J. Hodrick
