Evaluation of Linear Asset Pricing Models by Implied Portfolio Performance

46 Pages Posted: 15 Mar 2006

See all articles by Ronald J. Balvers

Ronald J. Balvers

McMaster University - Michael G. DeGroote School of Business

Dayong Huang

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics

Date Written: January 2006

Abstract

We adapt a metric of Kandel and Stambaugh (1995) to evaluate linear asset pricing models. The "KS-ratio" criterion rates a model's usefulness based on the mean portfolio return a mean-variance decision maker obtains for any variance choice by using the model for optimal portfolio decisions. It is equivalent to a cross-sectional GLS R-square criterion and to a measure of minimum distance between the asset and factor frontiers. We assess the KS-ratio compared to the HJ-distance and ad hoc goodness-of-fit evaluation criteria with simulated returns. We then apply the various criteria to evaluate nine prominent asset pricing models with actual data.

Keywords: Linear Asset Pricing Models, Model Evaluation, Portfolio Performance

JEL Classification: G12, C52, G11

Suggested Citation

Balvers, Ronald J. and Huang, Dayong, Evaluation of Linear Asset Pricing Models by Implied Portfolio Performance (January 2006). Available at SSRN: https://ssrn.com/abstract=891286 or http://dx.doi.org/10.2139/ssrn.891286

Ronald J. Balvers (Contact Author)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 x23969 (Phone)

HOME PAGE: http://profs.degroote.mcmaster.ca/business/balvers

Dayong Huang

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics ( email )

401 Bryan Building
Greensboro, NC 27402-6179
United States

HOME PAGE: http://sites.google.com/a/uncg.edu/dayong-huang/

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