2006-03-01
Downside Risk and Asset Pricing
Publication
Publication
Journal of Banking & Finance , Volume 30 - Issue 3 p. 823- 849
We analyze if the value-weighted stock market portfolio is stochastic dominance (SD) efficient relative to benchmark portfolios formed on size, value, and momentum. In the process, we also develop several methodological improvements to the existing tests for SD efficiency. Interestingly, the market portfolio seems third-order SD (TSD) efficient relative to all benchmark sets. By contrast, the market portfolio is inefficient if we replace the TSD criterion with the traditional mean–variance criterion. Combined these results suggest that the mean–variance inefficiency of the market portfolio is caused by the omission of return moments other than variance. Especially downside risk seems to be important for explaining the high average returns of small/value/winner stocks.
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doi.org/10.1016/j.jbankfin.2005.06.005, hdl.handle.net/1765/14066 | |
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Journal of Banking & Finance | |
Organisation | Erasmus Research Institute of Management |
Post, T., & van Vliet, P. (2006). Downside Risk and Asset Pricing. Journal of Banking & Finance, 30(3), 823–849. doi:10.1016/j.jbankfin.2005.06.005 |