Stochastic Spanning

29 Pages Posted: 9 Mar 2015 Last revised: 23 Oct 2016

See all articles by Stelios Arvanitis

Stelios Arvanitis

Athens University of Economics and Business

Mark Hallam

University of Essex - Essex Business School

Thierry Post

Graduate School of Business of Nazarbayev University

Date Written: October 4, 2015

Abstract

This study develops and implements methods for analyzing whether introducing new securities or relaxing investment constraints improves the investment opportunity set for risk averse investors. We develop a statistical test procedure for ‘stochastic spanning’ for two nested polyhedral portfolio sets based on subsampling and Linear Programming. The test is statistically consistent and asymptotically exact for a class of weakly dependent processes. Using this test, we accept market portfolio efficiency but reject two-fund separation in standard data sets of historical stock market returns. The divergence between the test results for the two hypotheses illustrates the role for higher-order moment risk in portfolio choice and challenges representative-investor models of capital market equilibrium.

Keywords: Portfolio choice, Stochastic Dominance, Spanning, Subsampling, Linear Programming, Asset Pricing

JEL Classification: C61, D81, G11

Suggested Citation

Arvanitis, Stelios and Hallam, Mark and Post, Thierry, Stochastic Spanning (October 4, 2015). Available at SSRN: https://ssrn.com/abstract=2575165 or http://dx.doi.org/10.2139/ssrn.2575165

Stelios Arvanitis

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
GREECE

Mark Hallam

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

HOME PAGE: http://www.essex.ac.uk/ebs/staff/profile.aspx?ID=5100

Thierry Post (Contact Author)

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

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