An information based one-factor asset pricing model

Ghosh, Anisha, Julliard, Christian ORCID: 0000-0001-8177-7441 and Taylor, Alex (2016) An information based one-factor asset pricing model. Financial Markets Group Discussion Papers (749). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

Given a set of asset returns, an information-theoretic approach is used to estimate non-parametrically the pricing kernel to price the given cross-section out-of-sample. Compared to leading factor models, this information SDF delivers smaller pricing errors and better cross-sectional fit, and identifies the maximum Sharpe ratio portfolio out-of-sample. Moreover, it extracts novel pricing information not captured by Fama-French and momentum factors, leading to an ‘information anomaly.' A tradable information portfolio that mimics this kernel has a very high out-of-sample Sharpe ratio, outperforming both the 1/N benchmark and the Value and Momentum strategies combined. These results hold for a wide cross-section of assets.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2016 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C13 - Estimation C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Other Model Applications
Date Deposited:	08 Jun 2023 09:54
Last Modified:	01 Oct 2024 03:20
URI:	http://eprints.lse.ac.uk/id/eprint/118978

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