Multivariate Tests for Stochastic Dominance Efficiency of a Given Portfolio
36 Pages Posted: 28 Jun 2004
Date Written: September 28, 2004
We develop empirical tests for stochastic dominance efficiency of a given investment portfolio relative to all possible portfolios formed from a set of assets. Our tests use multivariate statistical methods, which results in good statistical power properties and increases the comparability with existing mean-variance tests. Using our tests, we demonstrate that the mean-variance inefficiency of the CRSP all-share index relative to beta-sorted portfolios can be explained by tail risk not captured by variance.
Keywords: Stochastic dominance, asset pricing, portfolio efficiency
JEL Classification: G12, C14
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