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A Comparative Analysis of Ability of Mimicking Portfolios in Representing the Background Factors

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Abstract

Our aim is to give a comparative analysis of ability of different factor mimicking portfolios in representing the background factors. Our analysis contains a cross-sectional regression approach, a time-series regression approach and a portfolio approach for constructing factor mimicking portfolios. The focus of the analysis is the power of mimicking portfolios in the asset pricing models. We conclude that the time series regression approach, with the book-to-market sorted portfolios as the base assets, is the most proper alternative to construct mimicking portfolios for factors for which a time-series of factor realisation is available. To construct mimicking portfolios based on the firm characteristics we suggest a loading weighted portfolio approach.

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  • Asgharian, Hossein, 2004. "A Comparative Analysis of Ability of Mimicking Portfolios in Representing the Background Factors," Working Papers 2004:10, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2004_010
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    References listed on IDEAS

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    1. Louis K.C. Chan & Jason Karceski & Josef Lakonishok, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," NBER Working Papers 7039, National Bureau of Economic Research, Inc.
    2. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 07-89, Wharton School Rodney L. White Center for Financial Research.
    3. repec:bla:jfinan:v:44:y:1989:i:2:p:231-62 is not listed on IDEAS
    4. MacKinlay, A. Craig, 1995. "Multifactor models do not explain deviations from the CAPM," Journal of Financial Economics, Elsevier, vol. 38(1), pages 3-28, May.
    5. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    6. Chan, Louis K. C. & Karceski, Jason & Lakonishok, Josef, 1998. "The Risk and Return from Factors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(2), pages 159-188, June.
    7. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 7-89, Wharton School Rodney L. White Center for Financial Research.
    8. Chan, Louis K C & Karceski, Jason & Lakonishok, Josef, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 937-974.
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    More about this item

    Keywords

    mimicking portfolio; asset pricing; cross-sectional regression approach; time series regression approach;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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