Asset Prices and Omitted Moments; a Stochastic Dominance Analysis of Market Efficiency

30 Pages Posted: 26 Aug 2006

See all articles by Thierry Post

Thierry Post

Graduate School of Business of Nazarbayev University

Date Written: 13 2003 6,

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: stochastic dominance, market efficiency, asset pricing, statistical inference, size and book-to-market effects

JEL Classification: M, M41, G3, C19, G12

Suggested Citation

Post, Thierry, Asset Prices and Omitted Moments; a Stochastic Dominance Analysis of Market Efficiency (13 2003 6,). ERIM Report Series Reference No. ERS-2003-017-F&A. Available at SSRN: https://ssrn.com/abstract=423657

Thierry Post (Contact Author)

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

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