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Exploiting stochastic dominance to generate abnormal stock returns

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  • Clark, Ephraim
  • Kassimatis, Konstantinos

Abstract

In this paper, we construct zero cost portfolios based on second and third degree stochastic dominance and show that they produce systematic, statistically significant, abnormal returns. These returns are robust with respect to the single index CAPM, the Fama-French three-factor model, the Carhart four-factor model, and the liquidity five-factor model. They are also robust with respect to momentum portfolios, transactions costs, varying time periods, and when broken down by a range of risk factors, such as firm size, leverage, age, return volatility, cash flow volatility, and trading volume.

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  • Clark, Ephraim & Kassimatis, Konstantinos, 2014. "Exploiting stochastic dominance to generate abnormal stock returns," Journal of Financial Markets, Elsevier, vol. 20(C), pages 20-38.
    • Handle: RePEc:eee:finmar:v:20:y:2014:i:c:p:20-38
    DOI: 10.1016/j.finmar.2014.05.002
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    More about this item

    Keywords

    Stochastic dominance; Asset pricing;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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