Exploiting stochastic dominance to generate abnormal stock returns

Ephraim Clark and Konstantinos Kassimatis

Journal of Financial Markets, 2014, vol. 20, issue C, 20-38

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.

Keywords: Stochastic dominance; Asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:20:y:2014:i:c:p:20-38

DOI: 10.1016/j.finmar.2014.05.002

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