Stochastic Spanning

Stelios Arvanitis, Mark Hallam, Thierry Post, Nikolas Topaloglou
2017 Journal of business & economic statistics  
This 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
more » ... d 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.
doi:10.1080/07350015.2017.1391099 fatcat:jdip5neakfhengwayaqrxwqlmq