Downside risk and asset pricing

Thierry Post, Pim van Vliet

Research output: Contribution to journalArticle

34 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)823-849
Number of pages27
JournalJournal of Banking and Finance
Volume30
Issue number3
DOIs
Publication statusPublished - Mar 2006
Externally publishedYes

Fingerprint

Market portfolio
Asset pricing
Downside risk
Stochastic dominance
Mean-variance
Momentum
Benchmark portfolio
Inefficiency
Stock market
Benchmark

Keywords

  • Asset pricing
  • Downside risk
  • Lower partial moments
  • Stochastic dominance
  • Stock market efficiency

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Downside risk and asset pricing. / Post, Thierry; van Vliet, Pim.

In: Journal of Banking and Finance, Vol. 30, No. 3, 03.2006, p. 823-849.

Research output: Contribution to journalArticle

Post, Thierry ; van Vliet, Pim. / Downside risk and asset pricing. In: Journal of Banking and Finance. 2006 ; Vol. 30, No. 3. pp. 823-849.
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