Downside Risk and Asset Pricing

36 Pages Posted: 17 Feb 2004

See all articles by Thierry Post

Thierry Post

Graduate School of Business of Nazarbayev University

Pim van Vliet

Robeco Quantitative Investments

Date Written: 28 2004 7,


We analyze if the value-weighted stock market portfolio is second-order stochastic dominance (SSD) efficient relative to benchmark portfolios formed on size, value, and momentum. In the process, we also develop several methodological improvements to the existing tests for SSD efficiency. Interestingly, the market portfolio is SSD efficient relative to all benchmark sets. By contrast, the market portfolio is inefficient if we replace the SSD criterion with the traditional mean-variance criterion. Combined these results suggests that the mean-variance inefficiency of the market portfolio is caused by the omission of return moments other than variance. Especially downside risk seems to be important for rationalizing asset pricing puzzles in the 1970s and the early 1980s.

Keywords: stock market efficiency, asset pricing, SSD, lower partial moments, downside risk

JEL Classification: M, G3, G12

Suggested Citation

Post, Thierry and van Vliet, Pim, Downside Risk and Asset Pricing (28 2004 7,). ERIM Report Series Reference No. ERS-2004-018-F&A, Journal of Banking and Finance, Vol. 30, No. 3, pp. 823-849, March 2006, Available at SSRN:

Thierry Post (Contact Author)

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000

Pim Van Vliet

Robeco Quantitative Investments ( email )

Rotterdam, 3011 AG

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