Empirical Tests for Stochastic Dominance Efficiency

Posted: 31 Jan 2012

See all articles by Thierry Post

Thierry Post

Graduate School of Business of Nazarbayev University

Date Written: January 30, 2012

Abstract

We derive empirical tests for the stochastic dominance efficiency of a given portfolio with respect to all possible portfolios constructed from a set of assets. The tests can be computed using straightforward linear programming. Bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference. Our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation. Using our tests, the Fama and French market portfolio is significantly inefficient relative to benchmark portfolios formed on market capitalization and book-to-market equity ratio.

Suggested Citation

Post, Thierry, Empirical Tests for Stochastic Dominance Efficiency (January 30, 2012). Journal of Finance, Vol. 58, pp. 1905-1932, October 2003, Available at SSRN: https://ssrn.com/abstract=447365

Thierry Post (Contact Author)

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

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