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

Author

Listed:
  • Enrique Sentana

  • Francisco Penaranda

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 e.ciency. 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.

Suggested Citation

  • 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.
    • Handle: RePEc:fmg:fmgdps:dp497
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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