Working Paper: CEPR ID: DP4422
Authors: Francisco Pearanda; Enrique Sentana
Abstract: We propose new approaches to test for spanning in the return and stochastic discount factor mean-variance frontiers, which assess if either the centred or uncentred mean and cost representing portfolios are shared by the initial and extended sets of assets. We show that our proposed tests are asymptotically equivalent to the existing spanning tests under the null and sequences of local alternatives, and analyse their asymptotic relative efficiency. We also extend the theory of optimal GMM inference to deal with the singularities that arise in some spanning tests. Finally, we include an empirical application to money markets in Europe.
Keywords: Asset pricing; Asymptotic slopes; GMM; Representing portfolios; Singular covariance matrix
JEL Codes: G11; G12; C12; C13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RMVF (Y91) | SMVF (Y20) |
| Exclusion of certain assets (D14) | risk-return trade-offs (G11) |
| Inclusion of additional assets (G19) | tighter restrictions on asset pricing models (G19) |
| Application of tests to money markets in Europe (G15) | insights into portfolio diversification (G11) |
| Elimination of intra-European exchange rate risk (F31) | affected global investors' portfolio diversification opportunities (G11) |