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Multivariate Tests for Stochastic Dominance Efficiency of a Given Portfolio

Published online by Cambridge University Press:  06 April 2009

Thierry Post  and
Philippe Versijp
Thierry Post
Affiliation:
gtpost@few.eur.nl, Erasmus University Rotterdam, P.O. Box 1738, Rotterdam, DR 3000, The Netherlands.
Philippe Versijp
Affiliation:
versijp@few.eur.nl, Erasmus University Rotterdam, P.O. Box 1738, Rotterdam, DR 3000, The Netherlands.
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Abstract

We develop empirical tests for stochastic dominance efficiency of a given investment portfolio relative to all possible portfolios formed from a given set of assets. Our tests use multivariate statistics, which result in superior statistical power properties compared to existing stochastic dominance efficiency tests and increase the comparability with existing mean-variance efficiency 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 2 , June 2007 , pp. 489 - 515
Copyright
Copyright © School of Business Administration, University of Washington 2007

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