Downside Risk and Asset Pricing
2004-07-28
Research Paper
| Related Files |
|---|
View PDF Version
(ERS 2004 018 F&A.pdf, 1.5MB) |
We analyze if the value-weighted stock market portfolio is second-order stochastic dominance (SSD) 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 SSD efficiency. Interestingly, the market portfolio is SSD efficient relative to all benchmark sets. By contrast, the market portfolio is inefficient if we replace the SSD criterion with the traditional mean-variance criterion. Combined these results suggests 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 rationalizing asset pricing puzzles in the 1970s and the early 1980s.
- G3 : Corporate Finance and Governance
- G12 : Asset Pricing
- M : Business Administration and Business Economics; Marketing; Accounting
- portfolio
- market
- efficiency
- market portfolio
- utility
- value
- return
- utility function
- function
- downside risk
- asset
- sample
- result
- distribution
- pricing
- ssd efficiency
- momentum
- period
- error
- downside
