TY - JOUR
T1 - Downside risk and asset pricing
AU - Post, Thierry
AU - van Vliet, Pim
N1 - Funding Information:
We thank Mark Carhart, Kenneth French and Narasimhan Jegadeesh for providing portfolio return data. We appreciate the comments by two anonymous referees of this journal and Winfried Hallerbach, Haim Levy, Jan van der Meulen, Nico van der Sar, Jaap Spronk and Philippe Versijp. The paper has also benefited from comments from seminar participants at the Catholic University of Leuven, Maastricht University, Tel-Aviv University, Hebrew University of Jerusalem, Free University of Amsterdam and University of Zurich. Financial support by Tinbergen Institute (TI), Erasmus Research Institute of Management (ERIM) and Erasmus Center of Financial Research (ECFR) is gratefully acknowledged. Any remaining errors are the authors’ responsibility.
PY - 2006/3
Y1 - 2006/3
N2 - We analyze if the value-weighted stock market portfolio is stochastic dominance (SD) 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 SD efficiency. Interestingly, the market portfolio seems third-order SD (TSD) efficient relative to all benchmark sets. By contrast, the market portfolio is inefficient if we replace the TSD criterion with the traditional mean-variance criterion. Combined these results suggest 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 explaining the high average returns of small/value/winner stocks.
AB - We analyze if the value-weighted stock market portfolio is stochastic dominance (SD) 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 SD efficiency. Interestingly, the market portfolio seems third-order SD (TSD) efficient relative to all benchmark sets. By contrast, the market portfolio is inefficient if we replace the TSD criterion with the traditional mean-variance criterion. Combined these results suggest 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 explaining the high average returns of small/value/winner stocks.
KW - Asset pricing
KW - Downside risk
KW - Lower partial moments
KW - Stochastic dominance
KW - Stock market efficiency
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U2 - 10.1016/j.jbankfin.2005.06.005
DO - 10.1016/j.jbankfin.2005.06.005
M3 - Article
AN - SCOPUS:33644788899
SN - 0378-4266
VL - 30
SP - 823
EP - 849
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
IS - 3
ER -