In Brennan and Lo (2010), a mean-variance efficient frontier is defined as “impossible” if every portfolio on that frontier has negative weights, which is incompatible with the Capital Asset Pricing Model (CAPM) requirement that the market portfolio is mean-variance efficient. We prove that as the number of assets n grows, the probability that a randomly chosen frontier is impossible tends to o...

In the Data Streaming world, screening for outliers is an often overlooked aspect of the data preparation phase, which is needed to rationalize inferences drawn from the analysis of data. In this paper, we examine the effects of three outlier screens: A Trimming Window, The Box-Plot Screen and the Mahalanobis Screen on the market performance profile of firms traded on the NASDAQ and NYSE. From ...

Sometimes you just have to clench your teeth and go for the differential matrix algebra. And the central limit theorems. Together with the maximum likelihood techniques. And the static mean variance portfolio theory. Not forgetting the dynamic asset pricing models. And these are just the tools you need before you can start making empirical inferences in financial economics.” So wrote Ruben Lee,...

Within the framework of the conditional Arbritage Pricing Theory, estimators of conditional risk are not unique. We focus on an estimator of conditional risk based on the conditional volatility of the asset return. Estimates of conditional risk account for: 1) interdependence of conditional and unconditional moments of the asset return; 2) effect of the conditional and unconditional fourth mome...

U.S. stock portfolios sorted on size, momentum, transaction costs, M/B, I/A and ROA ratios, and industry classification show considerable levels and variation of return predictability, inconsistent with asset pricing models. This means that a predictable risk premium is not equal to compensation for systematic risk as implied by asset pricing theory (Kirby 1998). We show that introducing market...

The Great Moderation refers to the fall in U.S. output growth volatility in the mid-1980s. At the same time, the United States experienced a moderation in inflation and lower average inflation. Using annual data since 1890, we find that an earlier, 1946 moderation in output and consumption growth was comparable to that of 1984. Using quarterly data since 1947, we also isolate the 1969–83 Great ...

Motivated by notions of aversion to Knightian uncertainty, this paper develops the theory of competitive asset pricing and consumption/portfolio choice with homothetic recursive preferences that allow essentially any homothetic uncertainty averse certainty-equivalent form. The market structure is scale invariant but otherwise general, allowing any trading constraints that scale with wealth. Tec...

Inception of Markowitz’s modern portfolio theory has also fuelled the development of asset pricing models for empirical finance, ranging from linear single-factor models like the capital asset pricing model to fairly complex multi-factor models such as the arbitrage pricing theory (APT). It is well-known in the literature of finance that APT could be used for modelling the underlying security r...