Quantitative Finance

ISSN: 1469-7688 (Print) 1469-7696 (Online) Journal homepage: http://www.tandfonline.com/loi/rquf20

An exact test on structural changes in the weights

of the global minimum variance portfolio
Taras Bodnar
To cite this article: Taras Bodnar (2009) An exact test on structural changes in the weights
of the global minimum variance portfolio, Quantitative Finance, 9:3, 363-370, DOI:
10.1080/14697680802446748
To link to this article: http://dx.doi.org/10.1080/14697680802446748

Published online: 15 Apr 2009.

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Quantitative Finance, Vol. 9, No. 3, April 2009, 363370

An exact test on structural changes in the weights of

the global minimum variance portfolio
TARAS BODNAR*
Department of Statistics, European University Viadrina, PO Box 1786, 15207 Frankfurt (Oder), Germany

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(Received 20 November 2006; in final form 24 July 2008)

In the paper, a finite sample test is suggested for detecting changes in the composition of the
global minimum variance portfolio. The exact density of the test statistic is calculated.
It appears that under the null hypothesis of no change, it is independent of the parameters of
the asset returns distribution. The testing procedure is implemented in a situation that is
practically relevant. We show that ignoring the uncertainty about the estimated weights of the
holding portfolio leads to misleading results, i.e. to a more frequent reallocation of the
investors wealth.
Keywords: Asset pricing; Mean-variance analysis; Optimal portfolio weights; Multivariate test;
Parameter uncertainty; Exact distribution

1. Introduction
The mean-variance analysis of Markowitz (1952) is
currently important for both practitioners and researchers
in finance (cf. Litterman 2003). The theory provides an
easy access to the problem of optimal portfolio selection.
It is recommended that an investor invests in the portfolio
with the smallest risk for a given level of the expected
return. All optimal portfolios in the mean-variance space
lie on the parabola, which is called the efficient frontier
(cf. Merton 1972, Bodnar and Schmid 2008a).
However, by implementing the theory in a situation of
practical interest, the investor faces a number of
difficulties. The practical pitfalls of the mean-variance
analysis are mainly related to the extreme weights that
often arise when the sample efficient portfolio is
constructed (see, e.g. Merton (1980), Best and Grauer
(1991), Chopra and Ziemba (1993) among others). For
the first time, this phenomenon was studied by Merton
(1980), who argued that the estimates of the variances and
the covariances of the asset returns are more accurate
than the estimates of the means. Best and Grauer (1991)
showed that the sample efficient portfolio is extremely
sensitive to changes in the asset means, while Chopra and
Ziemba (1993) concluded for a real data set that errors

*Email: bodnar@euv-frankfurt-o.de

in means are over ten times as damaging as errors in

variances and over twenty times as damaging as errors in
covariances. For that reason, the global minimum
variance portfolio (GMVP) is extensively discussed in
the literature (Chan et al. 1999, Jagannathan and Ma
2003, Kempf and Memmel 2006, Frahm 2007, Bodnar
and Schmid 2008b). Note that the GMVP has the lowest
risk of all feasible portfolios. Because it lies on the vertex
of the efficient frontier, this portfolio is mean-variance
efficient as well. Hence, it can be considered as an
alternative investment in comparison to the other
portfolios on the efficient frontier.
The subject of the paper is the weights of the GMVP
portfolio, i.e. the parts of the investor wealth invested into
the selected assets. The results on the distributional
properties of the estimated optimal portfolio weights are
of great importance for evaluating the efficiency of the
underlying portfolio (see, e.g. Fleming et al. 2001). Okhrin
and Schmid (2006) found the first two moments of
the estimator for various optimal portfolio weights like,
e.g. the weights based on the expected utility and the
weights obtained by maximizing the Sharpe ratio. Bodnar
and Schmid (2008b) derived a small sample test for the
GMVP weights that is based on a central F-distribution,
while Britten-Jones (1999) showed that the estimated
portfolio weights can produce a large amount of the
estimation error. Because the weights of the GMVP are
independent of the mean vector of the asset returns,

Quantitative Finance
ISSN 14697688 print/ISSN 14697696 online
2009 Taylor & Francis
http://www.informaworld.com
DOI: 10.1080/14697680802446748

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364

T. Bodnar

the sampling error of its estimator is significantly reduced

(see, e.g. Frahm 2007).
The aim of the present paper is to derive a test for
detecting structural changes in the linear combinations of
the GMVP weights. This hypothesis is analysed in great
detail within the theory of linear models (e.g. Rao and
Toutenburg 1995). It covers a large number of relevant
and important testing problems. Our test statistic is
derived in a similar way. Although, the distribution of the
test statistic is independent of the parameters of the asset
returns distribution under the null hypothesis, contrary to
linear models, it is not a F-distribution. Thus, our results
cannot be obtained in a straightforward manner from the
theory of linear models.
The remaining sections of the paper are organized as
follows. In the next section, we introduce the weights of
the GMVP. A brief discussion is given for the distributional properties of its estimator. In section 3, the main
results are presented. Here, we introduce a test for
structural changes in the composition of the GMVP.
The exact density of the test statistic is derived. It is shown
that under the null hypothesis of no change, it is
independent of the parameters of the asset returns
distribution. In section 4, we show how the obtained
results are applicable. Final remarks are presented in
section 5. All proofs are provided in an appendix.

in the mean-variance space fully defines the position of

the vertex of the efficient frontier. The GMVP has been
recently discussed in a number of financial and econometrical studies (see, e.g. Frahm (2007), Bodnar and
Schmid (2008b) and references therein).
The parameters k and D are unknown in practice. This
is a well-known problem in portfolio selection theory,
which is known as the uncertainty of the parameters of
the asset returns distribution (see, e.g. Stambaugh 1997).
Because D is an unknown parameter, the investor cannot
use formula (2) to construct the GMVP. We assume that
a sample of the asset returns X1, . . . , Xn is available. It is
assumed that the random vectors X1, . . . , Xn are independent with Xi  N k (k, D) (multivariate normal distribution
with the mean vector k and the covariance matrix D) for
i 1, . . . , n. The normal assumption has been found to be
appropriate for describing the distribution of monthly
return data (Fama 1976). Moreover, Tu and Zhou (2004)
summarized that the normal approach works well for
a mean-variance investor. Although fat tails of the asset
return distributions influence the estimators of the
portfolio weights, their impact is not large. The authors
showed that the investor, who ignores heavy tails, has
relatively small losses.
Given a sample of asset returns X1, . . . , Xn, we estimate
D by its empirical counterpart
D^

2. Global minimum variance portfolio with the estimated

weights

subject to

w0 1 1 ,

i.e. the investor selects the portfolio with the smallest

variance of all feasible portfolios. The weights of the
GMVP are given by
wGMV

1 1
:
10

1 1

 Pn Xi =n. The estimator of the GMVP weights

with X
i1
is obtained by using D^ instead of D in (2) and it is given by

In the formulation of the mean-variance problem, we

consider a portfolio consisting of k assets. The weight of
the ith asset in the portfolio is denoted by wi. Let
w (w1, . . ., wk)0 be the vector of the portfolio weights and
let w0 1 1, where 1 denotes the vector of ones. It is
assumed that the whole investors wealth is shared
between the selected assets. We also keep the assumption
of short selling by allowing the portfolio weights to be
negative.
We assume that the second moments of asset returns
exist. Let k be the vector of the expected returns of the
assets and let D be its covariance matrix, where D is
positive definite. Then, the expected return of the
portfolio with the weight w is w0 k, and its variance is
equal to w0 Dw. There are different ways to construct an
optimal portfolio. In this paper, we analyse the weights of
the GMVP that are obtained as the solution to the
following minimization problem
w0
w ! min

n
1 X

 0
Xt
XX
t
X
n
1 t1

Note that the portfolio with the weights (2) has

a specific location on the efficient frontier. Its position

^ GMV
w

^
1 1
D
:
^
1 1
10 D

Okhrin and Schmid (2006) showed that (4) is an

unbiased estimator for (2). They also calculated the exact
density of the first k
1 components of (4). An alternative
derivation of the density function is given in Frahm
(2007). This result was extended by Bodnar and Schmid
(2008b), who derived the exact density function of p-linear
combinations of the estimator for the GMVP weights
given by
^L;p L^
w
wGMV

^
1 1
LD
,
^
1 1
10 D

where L is a p  k matrix of constants such that the matrix

~ p 1. They showed
L~ 0 L0 , 1 has a full rank, i.e. rkL
^ L;p has a p-dimensional t-distribution with n
k 1
that w
degrees of freedom, the mean vector E^
wL;p wL;p
LwGMV , and the variance matrix Var^
wL;p n
k
1
1
LRL0 =10 D
1 1 with R D
1
D
1 110 D
1 / 10 D
1 1. Thus
^ L;p is
the density of w
fL;p;n x

n
k p 1=210 D
1 1p=2

p

p=2 n
k 1=2 detLRL0
 1 10 D
1 1x
wL;p 0
 LRL0
1 x
wL;p
n
kp1=2 ,

where (x) stands for the -function.

An exact test on structural changes in the weights of the global minimum

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3. A test for structural changes in the GMVP weights

Once an optimal portfolio is constructed, an important
task for the investor is to decide whether to keep the
holding portfolio with the previously estimated weights or
to adjust it. Bodnar and Schmid (2008b) derived an exact
F-test for the null hypothesis, whereby linear combinations of the GMVP weights are equal to a given
p-dimensional vector of constants. Usually, this vector is
determined by using the estimated weights of the holding
portfolio that are considered to be known values. This
approach ignores the sample errors of the estimated
weights. As a result, it can lead to an incorrect decision
about the testing hypotheses.
The problem is analysed in this section. The results of
Bodnar and Schmid (2008b) are extended by taking the
randomness of the estimated weights of the holding
portfolio into consideration. From the statistical point of
view, the described problem can be dealt with by using
a test for structural changes in the portfolio weights.
However, from the financial point of view, it possesses
quite another interpretation. Because the investor estimates his future portfolio weights based on the information available today, it is treated as a forecasting problem
on the optimal portfolio weights.
We assume that the investor has constructed his GMVP
based on the random sample X1, . . . , Xn. Using the sample
Xn1, . . . , Xnm, he wants to decide if the constructed
portfolio is still an optimal one or whether it has to be
adjusted. It is assumed that Xn1, . . . , Xnm are indepen~ for i n 1, . . . , n m. Let
~ D
dent with Xi  N k k,
w~ D~
1 1=10 D~
1 1. Similar to (3) and (4), the estimator
of the covariance matrix and the GMVP weights based on
the sample Xn1, . . . , Xnm are
m
1 X
^
~
~ 0
Xnt
XX
D~
nt
X
m
1 t1

1

^
D~ 1
and w^~ GMV
7
^
1
10 D~ 1
P
~
with X
m
t1 Xnt =m.
~ L;p L~
Let w
w. We consider the general linear hypothesis given by
H0 : w~ L;p
wL;p 0 against

H1 : w~ L;p
wL;p 6 0:
8

This means that an investor is interested in knowing

whether there are changes in p linear restrictions of the
GMVP weights or not. This is a very general testing
problem including many important special cases
(cf. Greene 2003, pp. 9596).
The results of Bodnar and Schmid (2008b) motivate the
following test statistic for the testing problem (8)
0
m
k  0 ^~
1  ^
^ L;p
Tp
1 D 1 w~ L;p
w
p

 

^~ 0
1 ^~
 LRL
9
wL;p
w^ L;p :
This quantity is very similar to the F statistic for testing
a linear hypothesis within the linear regression model.

365

However, the distribution of the underlying quantities is

different than in the case of a linear model. The formula
for the exact density of the statistic Tp is based on
a hypergeometric function that is included as a standard
routine within many mathematical software packages
such as, e.g. in Mathematica. Following Abramowitz and
Stegun (1984, ch. 15), the hypergeometric function is
defined by
2 F1 a, b; c; x

Let a

1
c X
a ib i xi
:
ab i0
c i
i!

10

p
~ 0
1=2 wL;p
w~ L;p and
10 D~
1 1LRL
B

10 D~
1 1 ~ 0
1=2
~ 0
1=2 :
LRL0 LRL
LRL
10 D
1 1

Then it holds that

Theorem 3.1
(a) Let X1, . . . , Xnm be independently distributed
random vectors with X1, . . . , Xn  N k (k, D) and
~ Let n4k4p  1 and
~ D.
Xn1 , . . . , Xnm  N k k,
m4k4p  1. Assume that D and D~ are positive
0
~ p 1. Then
definite. Let L~ L0 , 1 and rkL
the exact density of the Tp-statistic is given by
2
nm
2kp1=2
fTp x fp,m
k x 
n
k 1 m
k p


2
2

1
1
i
m
k p 
X
px=2
i

Ki 2  
,
1
m
k px
i0
i! p
2 i
where fp,m
k(.) is the density of the central
F-distribution with p and m
k degrees of freedom and
Z 1 Z 1 m
kp2i

1
Ki
x1 2
exp
x1 =2
0
0

 !, !
I
1
0 B
 exp
a

a
2
x2 x1
n
kp1

1
2

 x2

Mi x1 , x2
exp
x2 =2 p dx1 dx2
detBx1 Ix2

with Mi (x1, x2) E((y0 y)i), y  N p(x2(Ix1 B
1x2)
1

B
1a,(Ix1 B
1x2)
1).
(b) Let X1, . . . , Xnm be independent and identically
distributed random vectors with X1  N k(k, D). Let
n4k4p  1 and m4k4p  1. Assume that D is
~ 0 L0 , 1z
positive
definite.
Let
L
and
~ p 1. Then under the null hypotheses H0
rkL
the exact density of the Tp-statistic is
n
k p 1=2n m
2k p 1=2
n
k 1=2n m
2k 2p 1=2

1
1
 fp,m
k x2 F1 m
k p, m
k p;
2
2

1
px
 n m
2k 2p 1;
,
2
m
k px

fTp x

where 2F1(., . ; . ; .) is the hypergeometric function.

366

T. Bodnar

Remark 1 From the results of Mathai and Provost

(1992, p. 53), Mi(x1, x2) can be calculated recursively. It
holds that
Mi x1 , x2

i
1
X

Cji
1 Mj x1 , x2 gi
1
j ,

j0

where M0(x1, x2) 1, Clm m!=l!m
l ! is a binomial

coefficient, and


gm 2m m! trIx1 B
1 x2
m1
m 1x22 a0 B
1 Ix1 B
1 x2
m2 B
1 a
for m 0, 1, . . . . The symbol tr stands for the trace of
a matrix.

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Remark 2 In the case of one linear restriction L l0 ,

p 1 from Theorem 2a of Bodnar and Schmid (2008b) we
obtain
fT1

n
k 2
p

10 D
1 1
2
p

f1,m
k x


p n
k 1
l0 Rl


2

m
k1=2
Z 1
0
1
1D 1
1 0

r
w^ l;1 2
l Rl

1


n
k2=2
0
1
1D 1
 1 0
r
wl;1 2
l Rl
0
Bn
k 1 n
k 1 1
x
B
,
, ;
2 F1 B
@
2
2
2 n
kx
1
10 D
1 1
2
r
w^ l;1 C
l0 Rl
C

C
10 D
1 1
2 A
r
w^ l;1
1 0
l Rl


n
k 2 p
Z

b 1
2
 p
f1,m
k x 
1 b y
a2
n
k2=2
n
k1


1

2

n
k1 n
k1
2
m
k1=2
,
,
 1 y
F
2 1
2
2

1
x
y2
 ;
,
2 n
k x 1 y2


p p
~ and b 10 D
1 1=
where a wl;1
w~ l;1 10 D~
1 1= l0 Rl
0 ~
1
0
0~
follows
from the
l Rl=1 D 1=l Rl. The last pequality
p

~ .
transformation y r
w~ l;1 10 D~
1 1= l0 Rl

Remark 3 The distribution of Tp-statistic does not

change if the assumption of normality is replaced by
a weaker assumption that the data matrix X (X1, . . . ,
Xn, Xn1, . . . , Xnm) is matrix variate elliptically contoured distributed (see, e.g. Gupta and Varga 1993). This
family of distribution seems to be very useful for
modelling dependent data which consist of uncorrelated
observations (Bodnar and Schmid 2008b).
Theorem 3.1 has many important applications. If, e.g.
the analyst would like to test whether the GMVP weight
of the first stock in the portfolio w~ GMV;1 is equal to its

previous value wGMV;1, we choose p 1

L (1, 0, . . . , 0). Then we get
 0 ^
1 2
1 D~ 1 w^~ GMV;1
w^ GMV;1 2
T 1 m
k
k
2
 0 ^
1 

P ^

~ 1 ^~

1

~
11

i1

and

11

1i

^
1
with D~ ^~

ij . Moreover, it provides a test for the
hypothesis that, e.g. all weights are equal to the
corresponding previously defined values. Consequently,
it can be used as a tool for detecting changes in the
GMVP. It permits a decision whether the portfolio should
be adjusted or not.
The results of Theorem 3.1b can be applied to construct
a 1
 confidence interval for the difference w~ L;p
wL;p ,
as well. It consists of all r that satisfies
0 

m
k 0 ^~
1  ^
^~ 0
1
1 D 1 w~ L;p
w^ L;p
r LRL
p


 w^~ L;p
w^ L;p
r  F~Tp ;1
 ,
12
where F~Tp ;1
 stands for the 1
 quantile of the
distribution of Tp with the density given in Theorem
3.1b. Equation (12) is the equation of an ellipsoid in Rp.
When the point (0, . . . , 0)0 belongs to (12) the null
hypothesis cannot be rejected. Otherwise H1 is accepted,
i.e. the holding GMVP has to be reconstructed.
Next, we consider the power function of the suggested
test. Because the distribution of Tp depends on a large
number of parameters, the discussion is given for a partial
case of the testing problem (8) with one linear restriction.
Based on Remark 2, the power function is obtained.
It depends on k, D, and L l0 only via the quantities
a and b, i.e.
Z F~T ;1

1
13
fT1 xdx ,
GT1 ; a, b 1

0

where a, b, and fT1(x) are given in Remark 2. This fact

simplifies the power study of the test.
In figures 1 and 2, the power of the test (8) is given
as a function of a and b. It holds that k 7, p 1,

0.8
0.6
Power 0.4
0.2
0
11

2
1.5
1

0.5

0
a

0.5

0.5
1

Figure 1. Power of the test based on Tp for theptesting

problem
p (8)
with p 1 as a function of a wl;1
w~ l;1 10

1 1= l0 Rl and
~ (n m 26, k 7, and  5%).
~
1 1=l0 Rl
b 10

1 1=l0 Rl=10

367

An exact test on structural changes in the weights of the global minimum

and  5%. The choice of n and m is consistent with the
empirical study of section 4, where the weekly asset
returns are considered. The case n m 26 (figure 1)
corresponds to half-year data of weekly asset returns,
while n m 52 (figure 2) stand for one-year data. Both
the figures illustrate a good performance of the test.
The power function increases if n and m increase.
Moreover, larger values of the power are observed for
larger values of b.

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1
0.75
Power 0.5
0.25

2
1.5

0
1
1

0.5

0
a

0.5

0.5
1

Figure 2. Power of the test based on Tp for the testing

problem
p
p
0
1
~
(8) with p 1 as a function of a wl;1
wl;1 1
1= l0 Rl
~
~
1 1=l0 Rl
and b 10

1 1=l0 Rl=10

(n m 52, k 7, and
 5%).

4. Empirical study
In order to obtain a better understanding for the results
presented in section 3, we consider an example with real
data in this section. We use weekly returns of seven
stocks, which are included in the Dow Jones index.
The considered assets in the study are the stocks of
American Express (ATX), Boeing Co. (BA), General
Motors Corp. (GM), IBM, Coca-Cola Co. (KO),
Microsoft Corp. (MSFT), and Walt Disney Co. (DIS).
The data are taken for the period from January 1995 to
December 2006. Based on the data from January 1995 to
December 1995, a global minimum variance portfolio is
determined. The rest of the data from January 1996 to
December 2006 are grouped on a yearly basis. They are
used for testing purposes.
Our aim is to detect changes in the composition of the
GMVP in two successive sub-periods. The results are
presented in table 1. It holds that k 7 and n m 52. For
each year, the estimated weights of the GMVP portfolio
and the corresponding estimators for the standard
deviation of each weight (in parentheses) are calculated.
The calculation is based on the distributional results for
the estimated GMVP weights given in section 2.
In order to test structural changes in the GMVP
weights, the test statistic of section 3 is applied.
The values of the test statistic are given in the ninth
column of table 1. Based on the results of Theorem 1b,
we obtain the p-values of the test that are given in the

Table 1. In the table the estimated GMVP weights and the test statistic Tp of section 3 are presented. We use weekly returns of
seven stocks included in the Dow Jones index for the period from January 1995 to December 2006. The weights sum to one.
The standard deviations of the estimated GMVP weights are given in parentheses. The p-values of the test are calculated using
the results of Theorem 3.1b. In the last column, the p-values of the test on the GMVP weights (see Bodnar and Schmid 2008b)
are given. Here, the test statistic from section 3 is applied by considering the estimated weights of the holding portfolio to be
known. In parentheses, the values of p and p~ are calculated with the actual GMVP weights used in the expression of the
corresponding test statistic.
Year

wATX

wBA

wGM

wIBM

wKO

wMSFT

wDIS

1995

0.09612
(0.0739)
0.06727
(0.1499)
0.05432
(0.1148)

0.26125
(0.1332)

0.00998
(0.0973)
0.03107
(0.1031)

0.01246
(0.1136)

0.07036
(0.1121)

0.04509
(0.1397)
0.36784
(0.1808)
0.04535
(0.1139)
0.24299
(0.1385)

0.16085
(0.0732)
0.20123
(0.1144)
0.28493
(0.0874)
0.08984
(0.0805)
0.32839
(0.0737)
0.08851
(0.0811)

0.03442
(0.0827)
0.20047
(0.0828)
0.13275
(0.1145)

0.06669
(0.0917)
0.04481
(0.1105)
0.05297
(0.0800)

0.12498
(0.0628)
0.32565
(0.0986)
0.19063
(0.0995)
0.20817
(0.1228)
0.09960
(0.1137)
0.27136
(0.0782)
0.18014
(0.1367)
0.09139
(0.1215)
0.07478
(0.1195)

0.03065
(0.1138)

0.01027
(0.0430)

0.05464
(0.0390)

0.07896
(0.0710)
0.05310
(0.0959)
0.09847
(0.0841)
0.32261
(0.1153)
0.19756
(0.0651)
0.08740
(0.0866)

0.00639
(0.1430)
0.17724
(0.1076)
0.48593
(0.1599)
0.20705
(0.1463)
0.01246
(0.0904)
0.12642
(0.1491)

0.32513
(0.0687)
0.14955
(0.1207)

0.11665
(0.1107)
0.38503
(0.1253)
0.10443
(0.0975)
0.30541
(0.0746)
0.66652
(0.0982)
0.47277
(0.0964)
0.51984
(0.1217)
0.28297
(0.0871)
0.56043
(0.1838)
0.42502
(0.1439)

0.07523
(0.0494)
0.09537
(0.1181)
0.01878
(0.0973)
0.18908
(0.1080)
0.13334
(0.0728)
0.11520
(0.0616)
0.19302
(0.1259)
0.14035
(0.1220)

0.14615
(0.1543)
0.22767
(0.1229)
0.21696
(0.1118)
0.06028
(0.0862)

0.13874
(0.0835)
0.10782
(0.1265)
0.46953
(0.1368)
0.06651
(0.1037)
0.14665
(0.0823)
0.10105
(0.0823)
0.01359
(0.1407)

0.01187
(0.1058)

0.02207
(0.1107)
0.01180
(0.0767)
0.13026
(0.0913)
0.14696
(0.1071)

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

p~

1.0572

0.8023
(0.8023)
0.4646
(0.1519)
0.0214
(0.2091)
0.0669
(0.2638)
0.3170
(0.8212)
0.1533
(0.0688)
0.3594
(0.8065)
0.8386
(0.4623)
0.0344
(0.2604)
0.3735
(0.3111)
0.6915
(0.1181)

0.4021
(0.4021)
0.0799
(0.0052)
0.0001
(0.0001)
0.0008
(0.0008)
0.0298
(0.0298)
0.0053
(0.0053)
0.0409
(0.0409)
0.4692
(0.4692)
0.0002
(0.0013)
0.0451
(0.0451)
0.2489
(0.2489)

2.0388
6.2524
4.7132
2.6043
3.6056
2.4234
0.9505
5.6046
2.3670
1.3661

Downloaded by [COMSATS Headquarters] at 04:17 02 April 2016

368

T. Bodnar

tenth column. In parentheses, the values of p are

calculated with the actual GMVP weights used in the
expression of the corresponding test statistic. The p-values
are independent of the parameters k and D, and they are
obtained using the numerical integration as provided in
Mathematica. For the 5% level of significance, we observe
two periods of significant deviation in the composition of
the GMVP in 1998 and 2004 if the GMVP weights of two
successive years are compared and no change in the case
of the actual GMVP weights.
Next, we want to compare the obtained results with
a situation where the weights of the holding portfolio are
considered to be known; i.e. the investor pays no
attention to the estimation error of the calculated
weights. The test statistic of Bodnar and Schmid
(2008b) is applied. The p-values of this test are denoted
~ They are given in the last column of table 1. For
by p.
the calculation, we use the fact that the corresponding
test statistic is F-distributed with p and m
k degrees
of freedom under H0 (Bodnar and Schmid 2008b,
Theorem 2b). The comparison of the performance
between the two tests leads to interesting results.
Ignoring the estimation error in the weights of the
holding portfolio leads to a more frequent reallocation
of the investors wealth. The null hypothesis of no
change in the GMVP weights is rejected another five
times in 1999, 2000, 2001, 2002, and 2005 in the case of
the comparison of the weights in two successive
subperiods
and
another
six
times
in
1997, 1999, 2000, 2001, 2002, and 2005 in the case of the
comparison with the actual GMVP weights.

5. Conclusion
In this paper we derive an exact test for detecting
structural changes in the weights of the GMVP.
The exact density of the test statistic is derived assuming
the asset returns to be independent and multivariate
normally distributed. It is shown that the density function
of the test statistic is independent of the parameters of the
asset returns k and D under the null hypothesis of no
change. As a result, the p-value of the test does not
depend on k and D, as well. It constitutes an advantage of
the suggested approach.
We implement the derived test in a practical relevant
situation by considering the weekly returns of seven
stocks included in the Dow Jones index. The obtained
results are compared with a situation where the weights of
the holding portfolio are assumed to be known. The test
on the GMVP weights of Bodnar and Schmid (2008b) is
applied. The p-values are calculated for both tests using
the numerical integration in Mathematica. Ignoring the
sample errors of the estimated weights of the holding
portfolio leads to a more frequent reconstruction of the
GMVP. It occurs another five times out of 11 for the 5%
level of significance if the GMVP weights of two
successive periods are compared.

Acknowledgement
The author would like to thank the referees for their
thoughtful and constructive suggestions that led to
a considerable improvement of this paper.

References
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An exact test on structural changes in the weights of the global minimum

Appendix A: Proof of Theorem 3.1

Let us consider
y0 yx1 y
a0 B
1 y
ax2 y0 yx1 y0 B
1 yx2

Proof
(a) From Theorem 2 of Bodnar and Schmid (2008b)
and the independency of (X1, . . . , Xn) and
(Xn1, . . . , Xnm), it follows that the density of Tp
^ L;p r is
given w
~
m
kp=2
fTp j w^ L;p r x fp,m
k x1 Qr



1
1
m


k

p
m


k

p
1
X
2
2
i
i 

1
i0
i! p
2 i
!i
~
pxQr

,
~
m
k px1 Qr

Downloaded by [COMSATS Headquarters] at 04:17 02 April 2016

369

~ 10 D~
1 1r
w~ L;p 0 LRL
~ 0
1 r
w~ L;p . Let
where Qr
(a)i (a i)/(a) and Qr 10 D
1 1r
wL;p 0 LRL0
1
r
wL;p . From (6) we get
Z
fTp x fTp jw^ L;p r xjrfw^ L;p r dr
r


n
kp1

10 D
1 1p=2
2


fp,m
k x
n
k 1 p

p=2 
detLRL0
2



1
1
m


k

p
m


k

p
1
X
2
2
i
i 

1
i0
i! p
2 i

i
px

I1 i ,
m
k px
where
Z

2a0 B
1 yx2 a0 B
1 ax2

y
x2 Ix1 B
1 x2
1 B
1 a0 Ix1 B
1 x2
 y
x2 Ix1 B
1 x2
1 B
1 a a0 B
1 ax2

a0 x2 B
1 Ix1 B
1 x2
1 Ix1 B
1 x2
 x2 Ix1 B
1 x2
1 B
1 a
y
x2 Ix1 B
1 x2
1 B
1 a0 Ix1 B
1 x2


I
1

1
1

1
0 B
 y
x2 Ix1 B x2 B a a

a,
x2 x1
where the last equality follows from the matrix inversion
lemma, i.e. (A
1 CG
1D0 )
1 A
AC(A D0 GC)
1
D0 A. Hence,
q
nm
2k2p1
~ 0

i
detLRL
2
2

I1 i 0
1 p=2  m
kp   n
kp1 
1 D~ 1 
i 
2
Z 1 Z 1 m
kp2i 2

1
x1 2
exp
x1 =2

0
0

 !, ! n
kp1
I
1

1
0 B
 exp
a

a
2 x2 2
x2 x1
2
p=2
 exp
x2 =2 p Mi x1 ; x2 dx1 dx2
detIx1 B
1 x2
where
Mi(x1, x2) E((y0 y)i)
with
y  N p(x2(Ix1

1

1
1
B x2) B a, (Ix1 B
1x2)
1). All combined, we
obtain the statement of Theorem 3.1a.
(b) We get B I, a 0, and Mi(x1, x2) E((y0 y)i) with
y  N p(0, (x1 x2)
1I). It yields
Mi x1 , x2 x1 x2
i Ex1 x2 y0 yi
 

i 1
i
p :
2 x1 x2
2 i

~
m
kp2i=2
~ i 1 Qr
Qr

I1 i
r

 1 Qr
n
kp1=2 dr:
p
~ 0
1=2
Making the transformation q
y 10 D~
1 1LRL
0

1
~ 1p=2 and
~ 0 =1 D
r
w~ L;p with the Jacobian detLRL
R
b
1
applying the equality A
b 1=2b b 0 exp
Ax=2dx,
b 40, it yields
q
~ 0
detLRL
2
nm
2k2p1=2
i
 

I1 i 0
1 p=2 
m
kp
n
kp1
1 D~ 1
i 

2
2
Z 1 Z 1 m
kp2i
Z
n
kp1

1

1
x1 2
exp
x1 =2x2 2
 y0 yi
y

 exp
x2 =2 exp
y0 yx1 y
a0 B
1

y
ax2 =2 dx1 dx2 dr
p
~ 0
1=2 wL;p
w
~ L;p and
with a 10 D~
1 1LRL
B

10 D~
1 1 ~ 0
1=2
~ 0
1=2 :
LRL0 LRL
LRL
10 D
1 1

A1

From Theorem 3.1a we obtain

  Z 1 Z 1 m
kp2i
1

1
Ki 2i
p
x 2
exp
x1 =2
2 i 0 0 1
n
kp1

1
2

 x2

exp
x2 =2x1 x2
i
p=2 dx1 dx2 :

The transformation x1 tx2 leads to

  Z1
m
kp2i
1
p
Ki 2i
t 2
1 1 t
i
p=2 I2 tdt ,
2 i 0
where
Z
I2 t
0

nm
2kp1

1
2

x2

nm
2kp1

exp
1 tx2 =2 dx2

nm
2kp1

2
2
1 t

2


n m
2k p 1

:
2

370

T. Bodnar

Hence,

Downloaded by [COMSATS Headquarters] at 04:17 02 April 2016

 


nm
2kp1
n m
2k p 1
i 1
2
p 2

Ki 2
2
2
Z1 i
nm
2k2p2i1
m
kp2i
2

t 2
1 1 t

dt
0
 


nm
2kp1
n m
2k p 1
i 1
2
p 2
2

2 i
2

 

 m
kp
i  n
kp1
2
2

 :

nm
2k2p1


i
2

Substitution of Ki yields

 

n
kp1
n m
2k p 1


2
2




fT x fp,m
k x
n
k1
n m
2k 2p 1


2
2



1
1
i
m
k p
m
k p 
1
X
2
px=2
i 2

 i

:
1
m
k px
i0
i!
n m
2k 2p 1
2
i

The theorem is proved.