Template-Type: ReDIF-Paper 1.0
Author-Name: Post, G.T.
Author-Name-Last: Post
Author-Name-First: Thierry
Author-Name: van Vliet, P.
Author-Name-Last: van Vliet
Author-Name-First: Pim
Author-Person: pvl6
Title: Downside Risk and Asset Pricing
Abstract: 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.
Creation-Date: 2004-07-28
File-URL: https://repub.eur.nl/pub/1424/ERS%202004%20018%20F&A.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2004-018-F&A
Classification-JEL: G12, G3, M
Keywords: SSD, asset pricing, downside risk, lower partial moments, stock market efficiency
Handle: RePEc:ems:eureri:1424