“Fund models, CAPM, and attempting to approximate growth optimality”
Lunedì 27 Maggio 2019, ore 14:30 - Sala Riunioni 701 - Kostas Kardaras (London School of Economics, London)
Fund models are introduced, where the returns of market assets are determined by regressing on the returns of specific funds. It is shown that the growth optimal portfolio of the market invests only on those funds; in fact, this turns out to be a characterisation of such models. The capital asset pricing model (CAPM) is a special case, where the “fund” is simply the market portfolio. Assuming a fund model, the goal of estimating the growth optimal portfolio becomes a lower-dimensional statistical problem; even in this case, it is shown that, under realistic market conditions, the “best” estimator will take a prohibitively long time to perform reasonably.
(Based on current ongoing work with Hyeng Keun Koo and Johannes Ruf)