Can short selling constraints explain the portfolio inefficiency of U.K. benchmark models?

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Fletcher, Jonathan (2017) Can short selling constraints explain the portfolio inefficiency of U.K. benchmark models? Advances in Investment Analysis and Portfolio Management. (In Press)

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Abstract

This study uses the Bayesian approach of Wang(1998) to examine the impact of no short selling constraints on the mean-variance inefficiency of linear factor models in U.K. stock returns and to conduct model comparison tests between the models. No short selling constraints lead to a substantial reduction in the mean-variance inefficiency of all factor models and eliminate the mean-variance inefficiency of some factor models in states when the lagged one-month U.K. Treasury Bill return is higher than normal. In model comparison tests, the best performing model is a six-factor model of Fama and French(2017a), which uses the small ends of the value, profitability, investment, and momentum factors.

ORCID iDs

Fletcher, Jonathan ORCID logoORCID: https://orcid.org/0000-0003-0568-9145;
CORE (COnnecting REpositories)