Portfolio Efficiency Tests with Conditioning Information - Comparing GMM and GEL Estimators

Abstract

We evaluate the use of Generalized Empirical Likelihood (GEL) estimators in portfolio efficiency tests for asset pricing models in the presence of conditional information. Estimators from GEL family present some optimal statistical properties, such as robustness to misspecification and better properties in finite samples. Unlike GMM, the bias for GEL estimators do not increase with the number of moment conditions included, which is expected in conditional efficiency analysis. By means of Monte Carlo experiments, we show that GEL estimators have better performance in the presence of data contaminations, especially under heavy tails and outliers. An extensive empirical analysis shows the properties of the estimators for different sample sizes and portfolios types for two asset pricing models.

Keywords: Portfolio Efficiency, Conditional Information, Efficiency Tests, GEL, GMM

JEL Classification: C12, C13, C58, G11, G12