Empirical Tests for Stochastic Dominance Efficiency

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120 Citations (Scopus)

Abstract

We derive empirical tests for the stochastic dominance efficiency of a given portfolio with respect to all possible portfolios constructed from a set of assets. The tests can be computed using straightforward linear programming. Bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference. Our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation. Using our tests, the Fama and French market portfolio is significantly inefficient relative to benchmark portfolios formed on market capitalization and book-to-market equity ratio.

Original languageEnglish
Pages (from-to)1905-1932
Number of pages28
JournalJournal of Finance
Volume58
Issue number5
DOIs
Publication statusPublished - Oct 2003

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ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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