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Stochastic Spanning

Arvanitis, S and Hallam, MS and Post, T and Topaloglou, N (2018) 'Stochastic Spanning.' Journal of Business and Economic Statistics. ISSN 0735-0015

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Abstract

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 and power properties in finite samples of realistic dimensions. In an application to standard data sets 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.

Item Type: Article
Uncontrolled Keywords: portfolio choice, stochastic dominance, spanning, subsampling, linear programming
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 09 Oct 2017 08:50
Last Modified: 18 Oct 2018 01:00
URI: http://repository.essex.ac.uk/id/eprint/20407

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