Paper #1101

Title:

Spanning tests in return and stochastic discount factor mean-variance frontiers: A unifying approach

Authors:

Francisco Peñaranda and Enrique Sentana

Date:

June 2008 (Revised: September 2010)

Abstract:

We propose new spanning tests that assess if the initial and additional assets share the economically meaningful cost and mean representing portfolios. We prove their asymptotic equivalence to existing tests under local alternatives. We also show that unlike two-step or iterated procedures, single-step methods such as continuously updated GMM yield numerically identical overidentifyng restrictions tests, so there is arguably a single spanning test. To prove these results, we extend optimal GMM inference to deal with singularities in the long run second moment matrix of the influence functions. Finally, we test for spanning using size and book-to-market sorted US stock portfolios.

Keywords:

Asset Pricing, Continuously Updated GMM, Generalised Empirical Likelihood, Generalised Inverse, Representing Portfolios, Singular Covariance Matrix

JEL codes:

G11, G12, C12, C13

Area of Research:

Finance and Accounting

Published in:

Journal of Econometrics, forthcoming

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