Working Paper: CEPR ID: DP6566
Authors: Francisco Pearanda; Enrique Sentana
Abstract: Portfolio and stochastic discount factor (SDF) frontiers are usually regarded as dual objects, and researchers sometimes use one to answer questions about the other. However, the introduction of conditioning information and active portfolio strategies alters this relationship. For instance, the unconditional portfolio frontier in Hansen and Richard (1987) is not dual to the unconditional SDF frontier in Gallant, Hansen and Tauchen (1990). We characterise the dual objects to those frontiers, and relate them to the frontiers generated with managed portfolios, which are commonly used in empirical work. We also study the implications of a safe asset and other special cases.
Keywords: Asset pricing; Dynamic portfolio strategies; Representing portfolios; Stochastic discount factors
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Conditional Portfolio Frontier (CPF) (G11) | Conditional Stochastic Discount Factor (SDF) Frontier (D15) |
| Unconditional Moments of Active Portfolios (G40) | Risk-Return Trade-Offs and Asset Pricing Constraints (G12) |
| Unconditional Frontiers (F55) | Markowitz Frontier for Returns (G11) |
| Geometric Interpretation of Duality (C61) | Sharpe Ratios (G12) |