A GMM Test for SSD Efficiency

18 Pages Posted: 24 Sep 2004

See all articles by Thierry Post

Thierry Post

Graduate School of Business of Nazarbayev University

P.J.P.M. Versijp

Amsterdam Business School; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: 28 2004 7,

Abstract

We develop an empirical test for Second-order Stochastic Dominance (SSD) efficiency of a given investment portfolio relative to all possible portfolios formed from a set of assets. Contrary to the Linear Programming test of Post, Thierry, 2003, Empirical tests for stochastic dominance efficiency, Journal of Finance 58, 1905—1932, our test is embedded in the Generalized Method of Moments (GMM) framework. The GMM test has superior statistical properties compared to the original LP test. Using this test, we demonstrate that the anomalous size effect can be explained with risk not captured by variance alone. However, the market portfolio remains SSD inefficient relative to value and momentum portfolios due to the overvaluation of growth stocks and past losers.

Keywords: stochastic dominance, generalized method of moments, asset pricing, market portfolio efficiency, size, B/M and momentum effects

JEL Classification: M, G3, G12

Suggested Citation

Post, Thierry and Versijp, Philippe, A GMM Test for SSD Efficiency (28 2004 7,). ERIM Report Series Reference No. ERS-2004-024-F&A, Available at SSRN: https://ssrn.com/abstract=594981

Thierry Post (Contact Author)

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

Philippe Versijp

Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018 WB
Netherlands

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
81
Abstract Views
1,070
rank
333,494
PlumX Metrics