Sensitivity to measurement errors of the distance to the efficient frontier

Marie Briere, Leopold Simar, Ariane Szafarz and Anne Vanhems

No 23-004, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: This paper builds confidence intervals for the distance in the mean-variance plan between any portfolio and the Markowitz efficient frontier. The distance can be calculated in any risk-return direction chosen by the investor. To do so, we introduce random variations of inputs and outputs and estimate the frontier. We then use subsampling approximations to derive confidence intervals around the distance of portfolios to the efficient frontier. This methodology offers a novel statistical approach to mean-variance portfolio choice, which is key for asset management. We apply this approach to show that the distance between the S&P 500 index and the efficient frontier made up of all the shares in the index is significantly different from zero in all testable directions. This result adds robustness to the still controversial Roll critique of the Capital Asset Pricing Model (CAPM). In the general setup of production theory, our paper addresses the sensitivity of the estimated efficiency scores to random variations in the original inputs-outputs.

Keywords: Portfolio choice; Random inputs-outputs; Directional distance; FDH estimator; Efficient frontier (search for similar items in EconPapers)
JEL-codes: C12 C44 C67 G11 G14 (search for similar items in EconPapers)
Date: 2023-05-09
New Economics Papers: this item is included in nep-eff
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published by:

Downloads: (external link)
https://dipot.ulb.ac.be/dspace/bitstream/2013/358148/3/wp23004.pdf Full text for the whole work, or for a work part (application/pdf)

Related works:
Working Paper: Sensitivity to measurement errors of the distance to the efficient frontier (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sol:wpaper:2013/358148

Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... lb.ac.be:2013/358148

Access Statistics for this paper

More papers in Working Papers CEB from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels (bpauwels@ulb.ac.be).