A Critical Investigation of the Explanatory Role of Factor Mimicking Portfolios in Multifactor Asset Pricing Models

31 Pages Posted: 16 Mar 2002

See all articles by Hossein Asgharian

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies

Bjorn Hansson

Lund University - Department of Economics

Date Written: February 28, 2002

Abstract

The common approach for constructing factor mimicking portfolios is to go long in assets with high loadings and to short-sell those with low loadings on some background factors. As a result portfolios containing stocks with low loading on the background factor receive negative betas against the corresponding mimicking portfolio. Thus, such portfolios appear as hedges against the background risk and may in tests of asset pricing models receive significant positive intercepts. The final result regarding acceptance or rejection of an asset pricing model may therefore to some extent be understood as a random outcome.

JEL Classification: G12

Suggested Citation

Asgharian, Hossein and Hansson, Bjorn, A Critical Investigation of the Explanatory Role of Factor Mimicking Portfolios in Multifactor Asset Pricing Models (February 28, 2002). EFA 2002 Berlin Meetings Discussion Paper. Available at SSRN: https://ssrn.com/abstract=302338 or http://dx.doi.org/10.2139/ssrn.302338

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies ( email )

P.O. Box 7082
S-220 07 Lund
Sweden
046-222-86-87 (Phone)

Bjorn Hansson (Contact Author)

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden
+46462228668 (Phone)
+46462224118 (Fax)

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