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

67 Pages Posted: 6 Jul 2004

See all articles by Francisco Penaranda

Francisco Penaranda

London School of Economics & Political Science (LSE) - Financial Markets Group

Enrique Sentana

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

Date Written: June 2004

Abstract

We propose new approaches to test for spanning in the return and stochastic discount factor mean-variance frontiers, which assess if either the centered or uncentered mean and cost representing portfolios are shared by the initial and extended sets of assets. We show that our proposed tests are asymptotically equivalent to the existing spanning tests under the null and sequences of local alternatives, and analyze their asymptotic relative efficiency. We also extend the theory of optimal GMM inference to deal with the singularities that arise in some spanning tests. Finally, we include an empirical application to money markets in Europe.

Keywords: Asset pricing, asymptotic slopes, GMM, representing portfolios, singular covariance, matrix

JEL Classification: C12, C13, G11, G12

Suggested Citation

Penaranda, Francisco and Sentana, Enrique, Spanning Tests in Return and Stochastic Discount Factor Mean Variance Frontiers: A Unifying Approach (June 2004). CEPR Discussion Paper No. 4422. Available at SSRN: https://ssrn.com/abstract=562063

Francisco Penaranda

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Enrique Sentana (Contact Author)

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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