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Mimicking Portfolios with Conditioning Information

Published online by Cambridge University Press:  06 April 2009

Wayne Ferson ,
Andrew F. Siegel  and
Pisun (Tracy) Xu
Wayne Ferson
Affiliation:
[email protected], Carroll School of Management, Boston College, Chestnut Hill, MA 02467
Andrew F. Siegel
Affiliation:
[email protected], University of Washington Business School, Box 353200, Seattle, WA 98195.
Pisun (Tracy) Xu
Affiliation:
[email protected], University of Washington Business School, Box 353200, Seattle, WA 98195.
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 3 , September 2006 , pp. 607 - 635
Copyright
Copyright © School of Business Administration, University of Washington 2006

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