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Spanning tests in return and stochastic discount factor mean-variance frontiers: A unifying approach

  • Francisco Peñaranda
  • Enrique Sentana

We propose new spanning tests that assess if the initial and additional assets share the economically meaningful cost and mean representing portfolios. We prove their asymptotic equivalence to existing tests under local alternatives. We also show that unlike two-step or iterated procedures, single-step methods such as continuously updated GMM yield numerically identical overidentifyng restrictions tests, so there is arguably a single spanning test. To prove these results, we extend optimal GMM inference to deal with singularities in the long run second moment matrix of the influence functions. Finally, we test for spanning using size and book-to-market sorted US stock portfolios.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1101.

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Date of creation: Jun 2008
Date of revision: Sep 2010
Handle: RePEc:upf:upfgen:1101
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