Testing Portfolio Efficiency with Conditioning Information
53 Pages Posted: 30 Sep 2002
Date Written: March 13, 2002
We develop tests of stochastic discount factor models and portfolio efficiency when there is conditioning information, in the form of a set of lagged instruments. In this setting a model identifies a portfolio that should be efficient with respect to the conditioning information. Our tests refine previous tests of portfolio efficiency, and appear substantially more powerful than tests that do not incorporate conditioning information. The tests reject the efficiency of the three Fama-French factors in any fixed-weight combination.
Suggested Citation: Suggested Citation