Testing for mean-coherent regular risk spanning

Coherent risk measures have received considerable attention in therecent literature. Coherent regular risk measures form an importantsubclass: they are empirically identifiable, and, when combined withmean return, they are consistent with second order stochastic domi-nance. As a consequence, these risk measures are natural candidatesin a mean-risk trade-off portfolio choice. In this paper we developa mean-coherent regular risk spanning test and related performancemeasure. The test and the performance measure can be implementedby means of a simple semi-parametric instrumental variable regres-sion, where instruments have a direct link with the stochastic discount factor. We illustrate applications of the spanning test and the performance measure for several coherent regular risk measures, including the well known expected shortfall.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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