Evaluating the Importance of Missing Risk Factors Using the Optimal Orthogonal Portfolio Approach
(2005) In Journal of Empirical Finance 12(4). p.556-575- Abstract
- 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:... (More)
- 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. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/1384548
- author
- Asgharian, Hossein LU and Hansson, Björn LU
- organization
- publishing date
- 2005
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- Investment strategy, Orthogonal portfolio, Simulated annealing, Factor pricing
- in
- Journal of Empirical Finance
- volume
- 12
- issue
- 4
- pages
- 556 - 575
- publisher
- North-Holland
- external identifiers
-
- scopus:26844566285
- ISSN
- 0927-5398
- DOI
- 10.1016/j.jempfin.2004.09.002
- language
- English
- LU publication?
- yes
- id
- 0fb10fbb-f9dd-4f21-86b1-e7345ab67106 (old id 1384548)
- date added to LUP
- 2016-04-01 16:24:05
- date last changed
- 2022-01-28 19:28:35
@article{0fb10fbb-f9dd-4f21-86b1-e7345ab67106, abstract = {{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.}}, author = {{Asgharian, Hossein and Hansson, Björn}}, issn = {{0927-5398}}, keywords = {{Investment strategy; Orthogonal portfolio; Simulated annealing; Factor pricing}}, language = {{eng}}, number = {{4}}, pages = {{556--575}}, publisher = {{North-Holland}}, series = {{Journal of Empirical Finance}}, title = {{Evaluating the Importance of Missing Risk Factors Using the Optimal Orthogonal Portfolio Approach}}, url = {{http://dx.doi.org/10.1016/j.jempfin.2004.09.002}}, doi = {{10.1016/j.jempfin.2004.09.002}}, volume = {{12}}, year = {{2005}}, }