Mean-Variance Spanning Tests : The Fiduciary Case in 401(k) Plans

We first highlight critical subtleties in the application of the standard Wald test for regression-based mean-variance spanning under short-sales constraints. We address the issue of near-singularity in particular by appealing to a characterization of stochastic discount factors in the presence of a risk-free asset. Next, we apply our approach to assess our proposal for a regulatory prudent default investment selection strategy in 401(k) plans. It consists of a low-volatility subset of funds that results in better spanning relative to the full plan menu. In effect, our study introduces a new dimension to the debate regarding the low-volatility anomaly