Working Paper: NBER ID: w11020
Authors: Wayne E. Ferson; Andrew F. Siegel; Pisun Tracy Xu
Abstract: Mimicking portfolios have long been useful in asset pricing research. In most empirical applications, the portfolio weights are assumed to be fixed over time, while in theory they may be functions of the economic state. This paper derives and characterizes mimicking portfolios in the presence of predetermined state variables, or conditioning information. The results generalize and integrate multifactor minimum variance efficiency (Fama, 1996) with conditional and unconditional mean variance efficiency (Hansen and Richard (1987), Ferson and Siegel, 2001). Empirical examples illustrate the potential importance of time-varying mimicking portfolio weights and highlight challenges in their application.
Keywords: mimicking portfolios; asset pricing; conditioning information; time-varying weights
JEL Codes: G1; G10; G11; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conditioning information (D83) | performance of mimicking portfolios (G11) |
| time-varying weights (C32) | correlation with economic factors (F44) |
| optimal adjustment of weights (C51) | performance of mimicking portfolios (G11) |
| mimicking portfolios (G11) | hedge against state variable risks (G52) |
| mimicking portfolios (G11) | identify factor risk premiums (G41) |
| time-varying weights (C32) | expected conditional correlation with economic factors (C10) |