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

Thierry Post

ERIM Report Series Research in Management from 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

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.

Keywords: asset pricing; market efficiency; size and book-to-market effects; statistical inference; stochastic dominance (search for similar items in EconPapers)
JEL-codes: C19 G12 G3 M M41 (search for similar items in EconPapers)
Date: 2003-06-13
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Persistent link: https://EconPapers.repec.org/RePEc:ems:eureri:430

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