Asymptotic Variances for Tests of Portfolio Efficiency and Factor Model Comparisons with Conditioning Information

64 Pages Posted: 24 Feb 2019

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)

Junbo L. Wang

Louisiana State University, Baton Rouge

Date Written: February 4, 2019

Abstract

We provide asymptotic standard errors for tests of asset pricing models and factor model comparisons with dynamic trading using conditioning information in the form of lagged instruments. The tests are based on comparing squared Sharpe ratios or their normalized differences. We provide results for both traded and non-traded factor models, and we study the optimal choice of the zero beta rate. We evaluate the asymptotic standard errors with simulations and provide applications to asset pricing model tests and factor model comparisons. We find that the incremental performance improvement of the FF5 model over the FF3 and the FF3 over the CAPM is greater when dynamic trading is allowed, as is the effect of a momentum factor. Dynamically trading consumption and liquidity hedging portfolios contribute significantly to the performance of most of the models.

Suggested Citation

Ferson, Wayne E. and Siegel, Andrew F. and Wang, Junbo L., Asymptotic Variances for Tests of Portfolio Efficiency and Factor Model Comparisons with Conditioning Information (February 4, 2019). Available at SSRN: https://ssrn.com/abstract=3330663 or http://dx.doi.org/10.2139/ssrn.3330663

Wayne E. Ferson

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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

Junbo L. Wang (Contact Author)

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

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