Is it Efficient to Buy the Index? A Worldwide Tour with Stochastic Dominance

57 Pages Posted: 20 Nov 2017 Last revised: 18 Jun 2019

See all articles by Olga Kolokolova

Olga Kolokolova

University of Manchester - Manchester Business School

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Xia Xu

EM Lyon (Ecole de Management de Lyon)

Date Written: June 17, 2019

Abstract

The paper develops a necessary condition for stochastic dominance efficiency at any order. We find that equity market indices of seventeen developed and developing countries across the globe are inefficient, nearly always at order three and very often at order two, making them not a suitable investment for a risk-averse and prudent investors. The indices are often dominated by individual industry sub-indices, with consumer goods, services, and utilities performing especially well. Macro factors such as the GDP growth rate, inflation, unemployment, and the current account balance predict future efficiency of the equity market indices, but exhibit the opposite signs for developed and developing markets. Strong values of aggregate economic indicators point to a higher likelihood of the equity market index efficiency for well-balanced economies; but they signal a lower likelihood of efficiency for less balanced economies, which heavily rely on only several key industries.

Keywords: Market index, Diversification, Stochastic Dominance, Optimal Portfolios

JEL Classification: D81, G11, G15

Suggested Citation

Kolokolova, Olga and Le Courtois, Olivier Arnaud and Xu, Xia, Is it Efficient to Buy the Index? A Worldwide Tour with Stochastic Dominance (June 17, 2019). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3071990 or http://dx.doi.org/10.2139/ssrn.3071990

Olga Kolokolova (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+44-161-306-2081 (Phone)

HOME PAGE: http://www.mbs.ac.uk/research/academicdirectory/profiles/olga.kolokolova.aspx

Olivier Arnaud Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

Xia Xu

EM Lyon (Ecole de Management de Lyon) ( email )

23 Ave Guy de Collongue
Ecully, 69134
France

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