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G.T. Post (Thierry)

2003-03-04

Statistical Inference on Stochastic Dominance Efficiency. Do Omitted Risk Factors Explain the Size and Book-to-Market Effects?

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This paper discusses statistical inference on the second-order stochastic dominance (SSD) efficiency of a given portfolio relative to all portfolios formed from a set of assets. We derive the asymptotic sampling distribution of the Post test statistic for SSD efficiency. Unfortunately, a test procedure based on this distribution involves low power in small samples. Bootstrapping is a more powerful approach to sampling error. We use the bootstrap to test if the Fama and French value-weighted market portfolio is SSD efficient relative to benchmark portfolios formed on market capitalization and book-tomarket equity ratio. During the late 1970s and during the 1980s, the market portfolio is significantly SSD inefficient, even if we use samples of only 60 monthly observations. This suggests that the size and book-to-market effects cannot be explained by omitted risk factors like higher-order central moments or lower partial moments.

Additional Metadata
Keywords asset pricing, market efficiency, size and book-to-market effects, statistical inference, stochastic dominance
JEL Econometric and Statistical Methods: Other (jel C19), Asset Pricing (jel G12), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M), Accounting (jel M41)
Publisher Erasmus Research Institute of Management
Persistent URL hdl.handle.net/1765/279
Series ERIM Report Series Research in Management
Rights Copyright 2003, T. Post, This report in the ERIM Report Series Research in Management is intended as a means to communicate the results of recent research to academic colleagues and other interested parties. All reports are considered as preliminary and subject to possibly major revisions. This applies equally to opinions expressed, theories developed, and data used. Therefore, comments and suggestions are welcome and should be directed to the authors.
Organisation Erasmus Research Institute of Management
Citation
Post, T. (2003). Statistical Inference on Stochastic Dominance Efficiency. Do Omitted Risk Factors Explain the Size and Book-to-Market Effects? (No. ERS-2003-017-F&A). ERIM Report Series Research in Management. Retrieved from http://hdl.handle.net/1765/279
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