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Spanning Analysis of Stock Market Anomalies Under Prospect Stochastic Dominance

Author

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  • Stelios Arvanitis

    (Department of Economics, Athens University of Economics and Business, 10434 Athens, Greece)

  • Olivier Scaillet

    (University of Geneva, Geneva School of Economics and Management, and Swiss Finance Institute, 1211 Geneva, Switzerland)

  • Nikolas Topaloglou

    (Department of Economics, Athens University of Economics and Business, 10434 Athens, Greece; Institut de Préparation à l’Administration et à la Gestion (IPAG), Business School, 15006 Paris, France)

Abstract

We develop and implement methods for determining whether introducing new securities or relaxing investment constraints improves the investment opportunity set for prospect investors. We formulate a new testing procedure for prospect spanning for two nested portfolio sets based on subsampling and linear programming. In an application, we use the prospect spanning framework to evaluate whether well-known anomalies are spanned by standard factors. We find that of the strategies considered, a few of them expand the opportunity set of the prospect type investors and thus have real economic value for them and involve absence of loss aversion. Those are the net stock issue anomaly under the FF-5 model, the momentum and net stock issue anomalies under the M-4 model, and the momentum anomaly under the q model. In-sample and out-of-sample results prove remarkably consistent in identifying genuine anomalies for prospect investors.

Suggested Citation

  • Stelios Arvanitis & Olivier Scaillet & Nikolas Topaloglou, 2024. "Spanning Analysis of Stock Market Anomalies Under Prospect Stochastic Dominance," Management Science, INFORMS, vol. 70(9), pages 6002-6025, September.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:9:p:6002-6025
    DOI: 10.1287/mnsc.2023.4953
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    Keywords

    nonparametric test; prospect stochastic dominance efficiency; prospect spanning; market anomaly; linear programming; absence of loss aversion;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General

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