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Assessing Asset Pricing Anomalies

Author

Listed:
  • Michael J. BRENNAN

    (University of California, Los Angeles)

  • Yihong XIA

    (University of Pennsylvania)

Abstract

The optimal portfolio strategy is developed for an investor who has detected an asset pricing anomaly but is not certain that the anomaly is genuine rather than merely apparent. The analysis takes account of the fact that the parametes of both the underlying asset pricing model and the anomalous returns are estimated rather than known. The value that an investor would place on the ability to invest to exploit the apparent anomaly is also derived and illustrative calculations are presented for the Fama-French three factor model, which is anomalous relative to the CAPM.

Suggested Citation

  • Michael J. BRENNAN & Yihong XIA, 1999. "Assessing Asset Pricing Anomalies," FAME Research Paper Series rp10, International Center for Financial Asset Management and Engineering.
    • Handle: RePEc:fam:rpseri:rp10
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    File URL: http://www.swissfinanceinstitute.ch/rp10.pdf
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    Cited by:

    1. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    2. Xia, Yihong, 2000. "Learning About Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation," University of California at Los Angeles, Anderson Graduate School of Management qt3167f8mz, Anderson Graduate School of Management, UCLA.
    3. Li, GuangJie, 2009. "The Horizon Effect of Stock Return Predictability and Model Uncertainty on Portfolio Choice: UK Evidence," Cardiff Economics Working Papers E2009/4, Cardiff University, Cardiff Business School, Economics Section, revised Aug 2009.
    4. Gollier Christian, 2004. "Optimal Dynamic Portfolio Risk with First-Order and Second-Order Predictability," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 4(1), pages 1-35, September.
    5. Guangjie Li, 2011. "The horizon effect of stock return predictability and model uncertainty on portfolio choice: UK evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 21(11), pages 771-787.

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