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Spanning tests for markowitz stochastic dominance

Arvanitis, Stelios
Topaloglou, Nikolas
Year 2018
Abstract Using properties of the cdf of a random variable defined as a saddle-type point of a real valued continuous stochastic process, we derive first-order asymptotic properties of tests for stochastic spanning w.r.t. a stochastic dominance relation. First, we define the concept of Markowitz stochastic dominance spanning, and develop an analytical representation of the spanning property. Second, we construct a non-parametric test for spanning via the use of an empirical analogy. The method determines whether introducing new securities or relaxing investment constraints improves the invest- ment opportunity set of investors driven by Markowitz stochastic dominance. In an application to standard data sets of historical stock market returns, we reject mar- ket portfolio Markowitz efficiency as well as two-fund separation. Hence there exists evidence that equity management through base assets can outperform the market, for investors with Markowitz type preferences.
Keywords Saddle-Type PointMarkowitz Stochastic DominanceSpanning TestLinear and Mixed integer programmingReverse S-shaped utility
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Research group Geneva Finance Research Institute (GFRI)
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ARVANITIS, Stelios, SCAILLET, Olivier, TOPALOGLOU, Nikolas. Spanning tests for markowitz stochastic dominance. 2018 https://archive-ouverte.unige.ch/unige:102836

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Deposited on : 2018-03-09

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