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A Critical Investigation of the Explanatory Role of Factor Mimicking Portfolios

Author

Summary, in English

The common approach for constructing factor mimicking portfolios is to go long in assets with high loadings and to short-sell those with low loadings on some background factors. As a result portfolios containing stocks with low loading on the background factor receive negative betas against the corresponding mimicking portfolio. Thus, such portfolios appear as hedges against the background risk and may in tests of asset pricing models receive significant positive intercepts. The final result regarding acceptance or rejection of an asset pricing model may therefore to some extent be understood as a random outcome.

Publishing year

2005

Language

English

Pages

47-835

Publication/Series

Applied Financial Economics

Volume

15

Issue

12

Document type

Journal article

Publisher

Taylor & Francis

Topic

  • Economics

Status

Published

ISBN/ISSN/Other

  • ISSN: 0960-3107