Testing for Spanning with Futrures Contracts and Nontraded Assets

A General Approach

Research output: Working paperDiscussion paperOther research output

382 Downloads (Pure)

Abstract

This paper generalizes the notion of mean-variance spanning as de- ned in the seminal paper of Huberman & Kandel (1987) in three di- mensions.It is shown how regression techniques can be used to test for spanning for more general classes of utility functions, in case some as- sets are nontraded, and in case some of the assets are zero-investment securities such as futures contracts.We then implement these tech- niques to test whether a basic set of three international stock indices, the S&P 500, the FAZ (Germany), and the FTSE (UK), span a set of commodity and currency futures contracts.Depending on whether mean-variance, logarithmic, or power utility functions are considered, the hypothesis of spanning can be rejected for most futures contracts considered.If an investor has a position in a nontraded commodity, then the hypothesis of spanning can almost always be rejected for fu- tures contracts on that commodity for all utility functions considered.For currency futures this is only the case for a power utility function that re ects a preference for skewness.Finally, if we explicitly take into account net futures positions of large traders that are known to have predictive power for futures returns, the hypothesis of spanning can be rejected for most futures contracts.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages31
Volume1996-83
Publication statusPublished - 1996

Publication series

NameCentER Discussion Paper
Volume1996-83

Fingerprint

Utility function
Assets
Futures contracts
Testing
Power utility
Currency futures
Commodities
Traders
Skewness
Investors
Predictive power
Germany
Commodity futures
Mean-variance
Stock index
Mean-variance spanning

Keywords

  • regression analysis
  • futures

Cite this

@techreport{30cf5d4322754b9b9a916d8bd61df196,
title = "Testing for Spanning with Futrures Contracts and Nontraded Assets: A General Approach",
abstract = "This paper generalizes the notion of mean-variance spanning as de- ned in the seminal paper of Huberman & Kandel (1987) in three di- mensions.It is shown how regression techniques can be used to test for spanning for more general classes of utility functions, in case some as- sets are nontraded, and in case some of the assets are zero-investment securities such as futures contracts.We then implement these tech- niques to test whether a basic set of three international stock indices, the S&P 500, the FAZ (Germany), and the FTSE (UK), span a set of commodity and currency futures contracts.Depending on whether mean-variance, logarithmic, or power utility functions are considered, the hypothesis of spanning can be rejected for most futures contracts considered.If an investor has a position in a nontraded commodity, then the hypothesis of spanning can almost always be rejected for fu- tures contracts on that commodity for all utility functions considered.For currency futures this is only the case for a power utility function that re ects a preference for skewness.Finally, if we explicitly take into account net futures positions of large traders that are known to have predictive power for futures returns, the hypothesis of spanning can be rejected for most futures contracts.",
keywords = "regression analysis, futures",
author = "T.E. Nijman and {de Roon}, F.A. and B.J.M. Werker",
note = "Pagination: 31",
year = "1996",
language = "English",
volume = "1996-83",
series = "CentER Discussion Paper",
publisher = "Finance",
type = "WorkingPaper",
institution = "Finance",

}

Testing for Spanning with Futrures Contracts and Nontraded Assets : A General Approach. / Nijman, T.E.; de Roon, F.A.; Werker, B.J.M.

Tilburg : Finance, 1996. (CentER Discussion Paper; Vol. 1996-83).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Testing for Spanning with Futrures Contracts and Nontraded Assets

T2 - A General Approach

AU - Nijman, T.E.

AU - de Roon, F.A.

AU - Werker, B.J.M.

N1 - Pagination: 31

PY - 1996

Y1 - 1996

N2 - This paper generalizes the notion of mean-variance spanning as de- ned in the seminal paper of Huberman & Kandel (1987) in three di- mensions.It is shown how regression techniques can be used to test for spanning for more general classes of utility functions, in case some as- sets are nontraded, and in case some of the assets are zero-investment securities such as futures contracts.We then implement these tech- niques to test whether a basic set of three international stock indices, the S&P 500, the FAZ (Germany), and the FTSE (UK), span a set of commodity and currency futures contracts.Depending on whether mean-variance, logarithmic, or power utility functions are considered, the hypothesis of spanning can be rejected for most futures contracts considered.If an investor has a position in a nontraded commodity, then the hypothesis of spanning can almost always be rejected for fu- tures contracts on that commodity for all utility functions considered.For currency futures this is only the case for a power utility function that re ects a preference for skewness.Finally, if we explicitly take into account net futures positions of large traders that are known to have predictive power for futures returns, the hypothesis of spanning can be rejected for most futures contracts.

AB - This paper generalizes the notion of mean-variance spanning as de- ned in the seminal paper of Huberman & Kandel (1987) in three di- mensions.It is shown how regression techniques can be used to test for spanning for more general classes of utility functions, in case some as- sets are nontraded, and in case some of the assets are zero-investment securities such as futures contracts.We then implement these tech- niques to test whether a basic set of three international stock indices, the S&P 500, the FAZ (Germany), and the FTSE (UK), span a set of commodity and currency futures contracts.Depending on whether mean-variance, logarithmic, or power utility functions are considered, the hypothesis of spanning can be rejected for most futures contracts considered.If an investor has a position in a nontraded commodity, then the hypothesis of spanning can almost always be rejected for fu- tures contracts on that commodity for all utility functions considered.For currency futures this is only the case for a power utility function that re ects a preference for skewness.Finally, if we explicitly take into account net futures positions of large traders that are known to have predictive power for futures returns, the hypothesis of spanning can be rejected for most futures contracts.

KW - regression analysis

KW - futures

M3 - Discussion paper

VL - 1996-83

T3 - CentER Discussion Paper

BT - Testing for Spanning with Futrures Contracts and Nontraded Assets

PB - Finance

CY - Tilburg

ER -