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Tests of Mean-Variance Spanning

  • Raymond Kan

    (University of Toronto)

  • Guofu Zhou

    (Washington University)

In this paper, we conduct a comprehensive study of tests of mean-variance spanning. We provide both a comparison and a geometrical interpretation of three asymptotic tests (likelihood ratio, Wald, and Lagrange multiplier) of mean-variance spanning under the regression based framework of Huberman and Kandel (1987). For the case of normality, we provide the exact distributions and a comprehensive power analysis of the three tests. For the general case, we provide the GMM version of the spanning tests and evaluate their performance using simulation. In addition, we compare the performance of the spanning tests under the regression approach with those under the stochastic discount factor approach. Our results suggest that the two approaches have similar properties when returns are normally distributed but the regression approach is superior to the stochastic discount factor approach when returns follow a multivariate Student-t distribution.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 539.

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Length: 65 pages
Date of creation: Sep 2001
Date of revision:
Publication status: Published in Annals of Economics and Finance, May 2012, pages 145-193
Handle: RePEc:cuf:wpaper:539
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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  5. Nijman, T.E. & de Roon, F.A. & Werker, B.J.M., 2001. "Testing for Mean-Variance spanning with short sales constraints and transaction costs : The case of emerging markets," Other publications TiSEM f4a3551a-d7ae-4c22-8813-b, Tilburg University, School of Economics and Management.
  6. 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.
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  10. Dufour, J.M. & Khalaf, L., 2000. "Simulation-Based Finite and Large Sample Tests in Multivariate Regressions," Cahiers de recherche 2000-10, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  11. de Roon, F.A. & Nijman, T.E. & Werker, B.J.M., 1998. "Testing for mean-variance spanning with short sales constraints and transaction costs : The case of emerging markets," Discussion Paper 1998-07, Tilburg University, Center for Economic Research.
  12. Jobson, J. D. & Korkie, Bob, 1983. "Statistical Inference in Two-Parameter Portfolio Theory with Multiple Regression Software," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(02), pages 189-197, June.
  13. de Roon, F.A. & Nijman, T.E., 1998. "Testing for mean-variance spanning : A survey," Discussion Paper 1998-132, Tilburg University, Center for Economic Research.
  14. Richardson, Matthew & Smith, Tom, 1993. "A Test for Multivariate Normality in Stock Returns," The Journal of Business, University of Chicago Press, vol. 66(2), pages 295-321, April.
  15. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  16. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-52, September.
  17. Geert Bekaert & Michael S. Urias, 1995. "Diversification, Integration and Emerging Market Closed-End Funds," NBER Working Papers 4990, National Bureau of Economic Research, Inc.
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