DP6566 Duality in Mean-Variance Frontiers with Conditioning Information
|Author(s):||Francisco Peñaranda, Enrique Sentana|
|Publication Date:||November 2007|
|Keyword(s):||Asset Pricing, Dynamic Portfolio Strategies, Representing portfolios, Stochastic Discount Factors|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=6566|
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.