Estimation of Portfolio-Balance Functions that are Mean-Variance Optimizing: The Mark and the Dollar


This paper offers a way of efficiently estimating the parameters in demand functions for mark and dollar assets. The technique imposes the constraint that the parameters, rather than being determined arbitrarily, are based on investors' optimizing behavior regarding expected returns and variances. It dominates some previous empirical applications of finance theory in the respect that the expected returns are allowed to vary from period to period, which is a necessary feature of any macro model. The constraint that the parameters are based on mean-variance optimization is also tested, and not rejected.

Publisher's Version

Last updated on 03/02/2021