A Test of Mean-Variance Efficiency When Short Selling is Prohibited

20 Pages Posted: 2 Jun 1998

See all articles by Gopal Basak

Gopal Basak

University of Bristol - Department of Mathematics

Guaqiang Sun

Federal National Mortgage Association (Fannie Mae)

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Date Written: May 1998

Abstract

We develop a statistical test for examining whether a given portfolio is mean-variance efficient with reference to the mean-variance frontier generated using a set of primitive assets. The set of primitive assets may include the given portfolio.We allow for short-sale restrictions while generating the mean-variance frontier using the primitive assets. Our measure of inefficiency is the difference between the variance of the given portfolio and the variance of the mean-variance efficient portfolio that has the same mean as the given portfolio. We derive the asymptotic distribution of the estimated measure of mean-variance inefficiency.

JEL Classification: G12

Suggested Citation

Basak, Gopal K. and Sun, Guaqiang and Jagannathan, Ravi, A Test of Mean-Variance Efficiency When Short Selling is Prohibited (May 1998). Available at SSRN: https://ssrn.com/abstract=94131 or http://dx.doi.org/10.2139/ssrn.94131

Gopal K. Basak

University of Bristol - Department of Mathematics ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Guaqiang Sun

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States
202-752-8849 (Phone)

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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