Stochastic Spanning |
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Authors: | Stelios Arvanitis Mark Hallam Thierry Post Nikolas Topaloglou |
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Affiliation: | 1. Department of Economics, AUEB, Athens 104 34, Greece (stelios@aueb.gr);2. Essex Business School, University of Essex, Colchester CO4 3SQ, United Kingdom (mark.hallam@essex.ac.uk);3. Graduate School of Business, Nazarbayev University, Astana 010000, Kazakhstan (thierrypost@hotmail.com);4. Ipag Business School, 75006 Paris, France, and Department of IEES, AUEB, Athens 104 34, Greece (nikolas@aueb.gr) |
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Abstract: | ABSTRACTThis study develops and implements methods for determining whether introducing new securities or relaxing investment constraints improves the investment opportunity set for all risk averse investors. We develop a test procedure for “stochastic spanning” for two nested portfolio sets based on subsampling and linear programming. The test is statistically consistent and asymptotically exact for a class of weakly dependent processes. A Monte Carlo simulation experiment shows good statistical size and power properties in finite samples of realistic dimensions. In an application to standard datasets of historical stock market returns, we accept market portfolio efficiency but reject two-fund separation, which suggests an important role for higher-order moment risk in portfolio theory and asset pricing. Supplementary materials for this article are available online. |
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Keywords: | Linear programming Portfolio choice Spanning Stochastic dominance Subsampling. |
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