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Exact distribution-free tests of mean-variance efficiency

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  • Gungor, Sermin
  • Luger, Richard

Abstract

This paper develops exact distribution-free tests of unconditional mean-variance efficiency. These new tests allow for unknown forms of non-normalities, conditional heteroskedasticity, and other non-linear temporal dependencies among the absolute values of the error terms in the asset pricing model. Exactness here rests on the assumption that the joint temporal error density is symmetric around zero. This still leaves open the possibility of return distribution asymmetry via coskewness with the benchmark portfolio. A simulation study shows that the new tests have very good power relative to that of many commonly used tests. The inference procedures developed are further illustrated by tests of the mean-variance efficiency of a market index using a 42-year sample of monthly returns on ten U.S. equity portfolios.

Suggested Citation

  • Gungor, Sermin & Luger, Richard, 2009. "Exact distribution-free tests of mean-variance efficiency," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 816-829, December.
    • Handle: RePEc:eee:empfin:v:16:y:2009:i:5:p:816-829
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    2. M Hashem Pesaran & Takashi Yamagata, 2024. "Testing for Alpha in Linear Factor Pricing Models with a Large Number of Securities," Journal of Financial Econometrics, Oxford University Press, vol. 22(2), pages 407-460.
    3. Pesaran, M. Hashem & Yamagata, Takashi, 2012. "Testing CAPM with a Large Number of Assets," IZA Discussion Papers 6469, Institute of Labor Economics (IZA).
    4. Sermin Gungor & Richard Luger, 2016. "Multivariate Tests of Mean-Variance Efficiency and Spanning With a Large Number of Assets and Time-Varying Covariances," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 34(2), pages 161-175, April.
    5. Beaulieu, Marie-Claude & Dufour, Jean-Marie & Khalaf, Lynda, 2010. "Asset-pricing anomalies and spanning: Multivariate and multifactor tests with heavy-tailed distributions," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 763-782, September.
    6. David Ardia & S'ebastien Laurent & Rosnel Sessinou, 2024. "High-Dimensional Mean-Variance Spanning Tests," Papers 2403.17127, arXiv.org.
    7. Pesaran, M. H. & Yamagata, T., 2012. "Testing CAPM with a Large Number of Assets (Updated 28th March 2012)," Cambridge Working Papers in Economics 1210, Faculty of Economics, University of Cambridge.
    8. Auld, T., 2022. "Political markets as equity price factors," Cambridge Working Papers in Economics 2264, Faculty of Economics, University of Cambridge.

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