Evaluating the Importance of Missing Risk Factors Using the Optimal Orthogonal Portfolio Approach
Författare
Summary, in English
We apply the orthogonal portfolio approach to analyse the importance of risk factors potentially missing from the CAPM. We generalize the approach proposed by MacKinlay and Pastor (2000) [MacKinlay, A.C., Pastor, L., 2000. Asset pricing models: implications for expected returns and portfolio selection. Review of Financial Studies 13, 883–916] by estimating the Sharpe ratio of the optimal orthogonal portfolio. Our result, based on US industry portfolios for the period 1927–2002, reveals important risk factors missing from the CAPM during periods with high market volatility. We show that a priori fixing the Sharpe ratio, which is an assumption used by MacKinlay and Pastor (2000) [MacKinlay, A.C., Pastor, L., 2000. Asset pricing models: implications for expected returns and portfolio selection. Review of Financial Studies 13, 883–916], may produce less plausible estimates of the expected returns.
Avdelning/ar
Publiceringsår
2005
Språk
Engelska
Sidor
556-575
Publikation/Tidskrift/Serie
Journal of Empirical Finance
Volym
12
Issue
4
Dokumenttyp
Artikel i tidskrift
Förlag
North-Holland
Ämne
- Economics
Nyckelord
- Investment strategy
- Orthogonal portfolio
- Simulated annealing
- Factor pricing
Aktiv
Published
ISBN/ISSN/Övrigt
- ISSN: 0927-5398