The Constrained Asset Share Estimation (CASE) Method: Testing Mean-Variance Efficiency of the U.S. Stock Market
Charles Engel, Jeffrey A. Frankel, Kenneth A. Froot, Anthony P. Rodrigues
NBER Working Paper No. 4294
We apply the method of constrained asset share estimation (CASE) to test the mean-variance efficiency (MVE) of the stock market. This method allows conditional expected returns to vary in relatively unrestricted ways. The data estimate reasonably the price of risk, and, in some cases, the MVE model is valuable in explaining expected equity returns. Unlike with most tests of MVE. we can put an explicit interpretation on the alternative hypothesis -- a general linear Tobin portfolio choice model. We reject the restrictions implied by MVE.
Published: revised as: "Tests of Conditional Mean-Variance Efficiency of the US Stock Market," Journal of Empirical Finance, vol 2, March 1995.