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Testing for Spanning with Futures Contracts and Nontraded Assets: A general Approach

Author

Listed:
  • de Roon, F. A.
  • Nijman, T. E.
  • Werker, B. J.

Abstract

This paper generalizes the notion of mean-variance spanning as de- ned in the seminal paper of Huberman & Kandel (1987) in three di- mensions.It is shown how regression techniques can be used to test for spanning for more general classes of utility functions, in case some as- sets are nontraded, and in case some of the assets are zero-investment securities such as futures contracts.We then implement these tech- niques to test whether a basic set of three international stock indices, the S&P 500, the FAZ (Germany), and the FTSE (UK), span a set of commodity and currency futures contracts.Depending on whether mean-variance, logarithmic, or power utility functions are considered, the hypothesis of spanning can be rejected for most futures contracts considered.If an investor has a position in a nontraded commodity, then the hypothesis of spanning can almost always be rejected for fu- tures contracts on that commodity for all utility functions considered.For currency futures this is only the case for a power utility function that re ects a preference for skewness.Finally, if we explicitly take into account net futures positions of large traders that are known to have predictive power for futures returns, the hypothesis of spanning can be rejected for most futures contracts.
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Suggested Citation

  • de Roon, F. A. & Nijman, T. E. & Werker, B. J., 1996. "Testing for Spanning with Futures Contracts and Nontraded Assets: A general Approach," SFB 373 Discussion Papers 1996,63, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    • Handle: RePEc:zbw:sfb373:199663
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    Cited by:

    1. Belousova, Julia & Dorfleitner, Gregor, 2012. "On the diversification benefits of commodities from the perspective of euro investors," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2455-2472.
    2. Galvani, Valentina & Plourde, André, 2013. "Spanning with futures contracts," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 61-72.
    3. de Roon, F.A. & Nijman, T.E. & Veld, C.H., 1997. "Analyzing specification errors in models for futures risk premia with hedging pressure," Discussion Paper 1997-102, Tilburg University, Center for Economic Research.
    4. Bessler, Wolfgang & Wolff, Dominik, 2015. "Do commodities add value in multi-asset portfolios? An out-of-sample analysis for different investment strategies," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 1-20.
    5. Daskalaki, Charoula & Skiadopoulos, George, 2011. "Should investors include commodities in their portfolios after all? New evidence," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2606-2626, October.
    6. Gagnon, Marie-Hélène & Manseau, Guillaume & Power, Gabriel J., 2020. "They're back! Post-financialization diversification benefits of commodities," International Review of Financial Analysis, Elsevier, vol. 71(C).

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