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Asset prices and omitted moments; A stochastic dominance analysis of market efficiency

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

We analyze if the value-weighted stock market portfolio is second-order stochastic dominance (SSD) efficient relative to benchmark portfolios formed on market capitalization, book-to-market equity ratio and industry classification. During the period from the mid-1970s to the late 1980s, the market portfolio is significantly mean-variance inefficient. During this period, the market portfolio generally also is significantly SSD inefficient. This suggests that mean-variance inefficiency cannot be explained by omitted return moments like higher-order central moments or lower partial moments.

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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-2003-017-F&A Revision_Date: 2009-10-26.

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Date of creation: 13 Jun 2003
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Handle: RePEc:dgr:eureri:3000450

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Related research
Keywords: stochastic dominance; market efficiency; asset pricing; statistical inference; size and book-to-market effects;

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