In this paper, we point out that the widely used stochastic discount factor (SDF) methodology ignores a fully specified model for asset returns. As a result, it suffers from two potential problems when asset returns follow a linear factor model. The first problem is that the risk premium...

In this paper, we analytically derive the expected loss function associated with using sample means and the covariance matrix of returns to estimate the optimal portfolio. Our analytical results show that the standard plug-in approach that replaces the population parameters by their sample...

In this paper, we construct a new variance bound on any stochastic discount factor (SDF) of the form m = m(x), with x being a vector of state variables, which tightens the well-known Hansen-Jagannathan bound by a ratio of one over the multiple correlation coefficient between x and the standard...

In this paper, we point out that the widely used stochastic discount factor (SDF) methodology ignores a fully specified model for asset returns. As a result, it suffers from two potential problems when asset returns follow a linear factor model. The first problem is that the risk premium...

The median is often a better measure than the mean in evaluating the long-term value of a portfolio. However, the standard plug-in estimate of the median is too optimistic. It has a substantial upward bias that can easily exceed a factor of two. In this paper, we provide an unbiased forecast of...

In this paper, we conduct a comprehensive study of tests for mean-variance spanning. Under the popular regression framework of Huberman and Kandel (1987), we provide geometric interpretations of three asymptotic tests (likelihood ratio, Wald, and Lagrange multiplier) of mean-variance spanning....