Skip to content
All library documents

Testing Whether Market Anomalies Expand Prospect Investors’ Portfolios

Article arXiv papers · Author: Stelios Arvanitis et al.
Read the original

Summary

The paper develops a way to test whether adding securities or relaxing investment constraints expands the opportunities available to investors who evaluate outcomes using prospect preferences. It formulates a test for prospect spanning between nested portfolio sets, using subsampling and linear programming.

The authors apply the procedure to assess whether established stock market anomalies are already spanned by standard factors. They report that many of the examined strategies expand the opportunity set for prospect investors, and that in-sample and out-of-sample results identify similar anomalies. The document does not list the strategies, sample design, or detailed test statistics, so the reported consistency and economic value cannot be assessed further from this description alone.

Key ideas

  • Prospect spanning tests whether one portfolio set offers meaningful new choices relative to a nested set.
  • The proposed procedure combines subsampling with linear programming.
  • The application tests whether stock market anomalies are spanned by standard factors.
  • Many examined anomaly strategies reportedly expand opportunities for prospect investors.
  • In-sample and out-of-sample findings are described as consistent, though details are not provided.

Tags

EquitiesStatisticsPortfolio constructionFactor investingBacktesting
Full text
# Spanning analysis of stock market anomalies under Prospect Stochastic Dominance


# Spanning analysis of stock market anomalies under Prospect Stochastic Dominance









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, many expand the opportunity set of the prospect type investors, thus have real economic value for them. In-sample and out-of-sample results prove remarkably consistent in identifying genuine anomalies for prospect investors.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.