Spanning analysis of stock market anomalies under Prospect Stochastic Dominance
88 Pages Posted: 9 Apr 2020 Last revised: 24 Aug 2021
Date Written: April 6, 2020
We develop and implement methods for determining whether introducing new securities or relaxing investment constraints improves the investment opportunity set for prospect investors. We formulate a new testing procedure for prospect spanning for two nested portfolio sets based on subsampling and Linear Programming. In an application, we use the prospect spanning framework to evaluate whether well-known anomalies are spanned by standard factors. We find that of the strategies considered, a few expand the opportunity set of the prospect type investors, thus have real economic value for them. In-sample and out-of-sample results prove remarkably consistent in identifying genuine anomalies for prospect investors.
Keywords: Nonparametric test, prospect stochastic dominance efficiency, prospect spanning, market anomaly, Linear Programming
JEL Classification: C12, C14, C44, C58, D81, G11, G40
Suggested Citation: Suggested Citation