Discussion Paper Details

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Title: Duality in Mean-Variance Frontiers with Conditioning Information

Author(s): Francisco Peñaranda and Enrique Sentana

Publication Date: November 2007

Keyword(s): Asset Pricing, Dynamic Portfolio Strategies, Representing portfolios and Stochastic Discount Factors

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Peñaranda, F and Sentana, E. 2007. 'Duality in Mean-Variance Frontiers with Conditioning Information'. London, Centre for Economic Policy Research.