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Downside Risk and Asset Pricing

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Author Info
Post, G.T.
Vliet, P. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)

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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.

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Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2004-018-F&A Revision_Date: 2009-10-26.

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Date of creation: 28 Jul 2004
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Handle: RePEc:dgr:eureri:30001554

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Related research
Keywords: stock market efficiency; asset pricing; SSD; lower partial moments; downside risk;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jose Olmo, 2007. "An Asset Pricing Model for Mean-Variance-Downside-Risk Averse Investors," City University Economics Discussion Papers 07/01, Department of Economics, City University, London. [Downloadable!]
  2. Post, G.T. & Vliet, P. van, 2004. "Conditional Downside Risk and the CAPM," Research Paper ERS-2004-048-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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