Stochastic Spanning

Stelios Arvanitis, Mark Hallam and Thierry Post ()
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Thierry Post: Graduate School of Business, Koç University

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: This study develops and implements a theory and method for analyzing whether introducing new securities or relaxing investment constraints improves the investment opportunity set for risk averse investors. We develop a test procedure for ‘stochastic spanning’ for two nested polyhedral portfolio sets based on subsampling and Linear Programming. The procedure is statistically consistent and asymptotically exact for a class of weakly dependent processes. Using the stochastic spanning tests, we accept market portfolio efficiency but reject two-fund separation in standard data sets of historical stock market returns. The divergence between the results of the two tests illustrates the role for higher-order moment risk in portfolio choice and challenges representative-investor models of capital market equilibrium.

Keywords: Portfolio choice; Stochastic Dominance; Spanning; Subsampling; Linear Programming; Asset Pricing. (search for similar items in EconPapers)
JEL-codes: C61 D81 G11 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015-04
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Related works:
Journal Article: Stochastic Spanning (2019)
Working Paper: Stochastic Spanning (2015)
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