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Spanning Tests in Return and Stochastic Discount Factor Mean Variance Frontiers: A Unifying Approach

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Peñaranda, Francisco
Sentana, Enrique

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Abstract

We propose new approaches to test for spanning in the return and stochastic discount factor mean-variance frontiers, which assess if either the centred or uncentred mean and cost representing portfolios are shared by the initial and extended sets of assets. We show that our proposed tests are asymptotically equivalent to the existing spanning tests under the null and sequences of local alternatives, and analyse their asymptotic relative efficiency. We also extend the theory of optimal GMM inference to deal with the singularities that arise in some spanning tests. Finally, we include an empirical application to money markets in Europe.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4422.

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Date of creation: Jun 2004
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Handle: RePEc:cpr:ceprdp:4422

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Keywords: asset pricing asymptotic slopes GMM matrix representing portfolios singular covariance

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

References listed on IDEAS
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  1. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April. [Downloadable!] (restricted)
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  2. Hansen, Lars Peter & Heaton, John & Yaron, Amir, 1996. "Finite-Sample Properties of Some Alternative GMM Estimators," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 262-80, July.
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  6. Breusch, Trevor & Qian, Hailong & Schmidt, Peter & Wyhowski, Donald, 1999. "Redundancy of moment conditions," Journal of Econometrics, Elsevier, vol. 91(1), pages 89-111, July. [Downloadable!] (restricted)
  7. F. A. d. ROON & T. E. NIJMAN & B. J. WERKER, . "Testing for Spanning with Futures Contracts and Nontraded Assets: A general Approach," Sonderforschungsbereich 373 1996-63, Humboldt Universitaet Berlin.
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  8. Ferson, Wayne E & Foerster, Stephen R & Keim, Donald B, 1993. " General Tests of Latent Variable Models and Mean-Variance Spanning," Journal of Finance, American Finance Association, vol. 48(1), pages 131-56, March. [Downloadable!] (restricted)
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  12. Ignacio Palacios-Huerta, 2003. "An Empirical Analysis of the Risk Properties of Human Capital Returns," American Economic Review, American Economic Association, vol. 93(3), pages 948-964, June. [Downloadable!] (restricted)
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  13. Sentana, E., 1997. "Least Squares Predictions and Mean-Variance Analysis," Papers 9711, Centro de Estudios Monetarios Y Financieros-.
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  14. Enrique Sentana & Francisco Penaranda, 2004. "Spanning Tests in Return and Stochastic Discount Factor Mean-Variance Frontiers: A Unifying Approach," FMG Discussion Papers dp497, Financial Markets Group. [Downloadable!] (restricted)
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  15. Alastair R. Hall, 2000. "Covariance Matrix Estimation and the Power of the Overidentifying Restrictions Test," Econometrica, Econometric Society, vol. 68(6), pages 1517-1528, November.
  16. Robert M. De Jong & James Davidson, 2000. "Consistency of Kernel Estimators of Heteroscedastic and Autocorrelated Covariance Matrices," Econometrica, Econometric Society, vol. 68(2), pages 407-424, March.
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  17. Gallant, A. Ronald & Hansen, Lars Peter & Tauchen, George, 1990. "Using conditional moments of asset payoffs to infer the volatility of intertemporal marginal rates of substitution," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 141-179. [Downloadable!] (restricted)
  18. Gourieroux, C. & Monfort, A. & Renault, E., 1991. "Two Stage Generalized Moment Method with Applications to Regressions with heteroscedasticity of Unknown Form," Papers 9128, Institut National de la Statistique et des Etudes Economiques-.
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  19. DeRoon, Frans A. & Nijman, Theo E., 2001. "Testing for mean-variance spanning: a survey," Journal of Empirical Finance, Elsevier, vol. 8(2), pages 111-155, May. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

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  4. Francisco Peñaranda & Enrique Sentana, 2004. "Spanning Tests In Return And Stochastic Discount Factor Mean-Variance Frontiers: A Unifying Approach," Working Papers wp2004_0410, CEMFI. [Downloadable!]
    Other versions:
  5. Gur Huberman & Zhenyu Wang, 2005. "Arbitrage pricing theory," Staff Reports 216, Federal Reserve Bank of New York. [Downloadable!]
  6. Aleix Calveras & Juan-José Ganuza & Gerard Llobet, 2005. "Regulation And Opportunism: How Much Activism Do We Need?," Working Papers wp2005_0508, CEMFI. [Downloadable!]
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