EVALUATION OF LINEAR ASSET PRICING MODELS BY IMPLIED PORTFOLIO PERFORMANCE

Ronald J. Balvers () and Dayong Huang

No 05-06 Classification- JEL: G12, C52, G11, Working Papers from Department of Economics, West Virginia University

Abstract: We adapt the metric of Kandel and Stambaugh (1995) to evaluate linear asset pricing models. The “KS-ratio” criterion rates a model’s usefulness based on the mean portfolio return a mean-variance decision maker obtains for any variance choice by using the model for optimal portfolio decisions. It is equivalent to a cross-sectional GLS R-square criterion and to a measure of minimum distance between the asset and factor frontiers. We assess the KS-ratio compared to the HJ-distance and ad hoc goodness-of-fit evaluation criteria with simulated returns. We then apply the various criteria to evaluate nine prominent asset pricing models with actual data.

Keywords: Linear Asset Pricing Models; Model Evaluation; Portfolio Performance (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-rmg
Date: 2005
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Related works:
Journal Article: Evaluation of linear asset pricing models by implied portfolio performance (2009)
Working Paper: EVALUATION OF LINEAR ASSET PRICING MODELS BY IMPLIED PORTFOLIO PERFORMANCE (2005)
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