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A Conditional Asset Pricing Model with the Optimal Orthogonal Portfolio

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Author

Summary, in English

This paper employs a conditional asset-pricing model based on the optimal orthogonal portfolio approach to construct a factor portfolio that embodies all the latent factors important for pricing a given set of test assets. The advantage of this portfolio to the anomaly related mimicking portfolios is its ability to separate out the components of average return that are not related to the return covariation. The performance of this portfolio is evaluated against several conventional factors, using both cross-sectional and time-series regression approaches, as well as the Hansen and Jagannathan (1997) distance measure. Its strong out-of-sample results indicate that our suggested methodology may have important applications in risk management, portfolio selection and performance evaluation.

Publishing year

2011

Language

English

Pages

1027-1040

Publication/Series

Journal of Banking & Finance

Volume

35

Issue

5

Document type

Journal article

Publisher

Elsevier

Topic

  • Economics

Keywords

  • Optimal orthogonal portfolio
  • Factor pricing
  • Time-varying risk premium

Status

Published

ISBN/ISSN/Other

  • ISSN: 1872-6372