Downside Risk and Asset Pricing

36 Pages Posted: 17 Feb 2004  

Thierry Post

Koc University - Graduate School of Business

Pim van Vliet

Robeco Asset Management - Quantitative Strategies

Date Written: 28 2004 7,

Abstract

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,). ; Journal of Banking and Finance, Vol. 30, No. 3, pp. 823-849, March 2006. Available at SSRN: https://ssrn.com/abstract=503142

Thierry Post (Contact Author)

Koc University - Graduate School of Business ( email )

Rumelifeneri Yolu
34450 Sariyer
Istanbul
Turkey

Pim Van Vliet

Robeco Asset Management - Quantitative Strategies ( email )

Rotterdam, 3011 AG
Netherlands

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