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Multivariate Tests for Stochastic Dominance Efficiency of a Given Portfolio

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  • Post, Thierry
  • Versijp, Philippe

Abstract

We develop empirical tests for stochastic dominance efficiency of a given investment portfolio relative to all possible portfolios formed from a given set of assets. Our tests use multivariate statistics, which result in superior statistical power properties compared to existing stochastic dominance efficiency tests and increase the comparability with existing mean-variance efficiency tests. Using our tests, we demonstrate that the mean-variance inefficiency of the CRSP all-share index relative to beta-sorted portfolios can be explained by tail risk not captured by variance.

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  • Post, Thierry & Versijp, Philippe, 2007. "Multivariate Tests for Stochastic Dominance Efficiency of a Given Portfolio," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(2), pages 489-515, June.
    • Handle: RePEc:cup:jfinqa:v:42:y:2007:i:02:p:489-515_00
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