Spanning tests for Markowitz stochastic dominance

Stelios Arvanitis, Olivier Scaillet and Nikolas Topaloglou

Journal of Econometrics, 2020, vol. 217, issue 2, 291-311

Abstract: We derive properties of the cdf of random variables defined as saddle-type points of real valued continuous stochastic processes. This facilitates the derivation of the first-order asymptotic properties of tests for stochastic spanning given some stochastic dominance relation. We define the concept of Markowitz stochastic dominance spanning, and develop an analytical representation of the spanning property. We construct a non-parametric test for spanning based on subsampling, and derive its asymptotic exactness and consistency. The spanning methodology determines whether introducing new securities or relaxing investment constraints improves the investment opportunity set of investors driven by Markowitz stochastic dominance. In an application to standard datasets of historical stock market returns, we reject market portfolio Markowitz efficiency as well as two-fund separation. Hence, we find evidence that equity management through base assets can outperform the market, for investors with Markowitz type preferences.

Keywords: Saddle-type point; Markowitz stochastic dominance; Spanning test; Linear and mixed integer programming; Reverse S-shaped utility (search for similar items in EconPapers)
JEL-codes: C12 C14 C44 C58 D81 G11 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Spanning Tests for Markowitz Stochastic Dominance (2018)
Working Paper: Spanning Tests for Markowitz Stochastic Dominance (2018)
Working Paper: Spanning tests for markowitz stochastic dominance (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:217:y:2020:i:2:p:291-311

DOI: 10.1016/j.jeconom.2019.12.005

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