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

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  • Post, G.T.

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.

Suggested Citation

  • Post, G.T., 2003. "Asset prices and omitted moments; A stochastic dominance analysis of market efficiency," ERIM Report Series Research in Management ERS-2003-017-F&A, 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.
    • Handle: RePEc:ems:eureri:430
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    More about this item

    Keywords

    asset pricing; market efficiency; size and book-to-market effects; statistical inference; stochastic dominance;
    All these keywords.

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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