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

74 Pages Posted: 8 Oct 2008

See all articles by Francisco Penaranda

Francisco Penaranda

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Date Written: June 18, 2008

Abstract

We propose new spanning tests that assess if the economically meaningful cost and mean representing portfolios are shared by the initial and additional assets. We show that our proposed tests are asymptotically equivalent to existing ones under local alternatives, and analyse their asymptotic relative efficiency. We extend optimal GMM inference to deal with singularities arising in some spanning tests, and show that our tests generalise naturally to situations in which we consider all active portfolio strategies. Finally, we apply our tests to strategies involving size and book-to-market sorted stock portfolios whose weights depend on the state of the credit cycle.

Keywords: Asset Pricing, Asymptotic Slopes, Dynamic Portfolio Strategies, GMM, Representing portfolios, Singular Covariance Matrix

JEL Classification: G11, G12, C12, C13

Suggested Citation

Penaranda, Francisco and Sentana, Enrique, Spanning Tests in Return and Stochastic Discount Factor Mean-Variance Frontiers: A Unifying Approach (June 18, 2008). Available at SSRN: https://ssrn.com/abstract=1280802 or http://dx.doi.org/10.2139/ssrn.1280802

Francisco Penaranda (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

Houghton Street
London School of Economics & Political Science (LSE)
London WC2A 2AE
United Kingdom
+44 20 7955 7002 (Phone)
+44 20 7852 3580 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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