1 / 8

Value versus Growth: Stochastic Dominance Criteria

This paper by Abhay Abhyankar, Keng-Yu Ho, and Huainan Zhao examines the performance of value and growth portfolios through the lens of stochastic dominance criteria. It analyzes cumulative distribution functions (CDFs) to establish first, second, and third order dominance relationships. Empirical findings from 1951 to 2003 reveal that value stocks generally outperform growth stocks, especially during boom and recession periods. The study contributes to the discussion on the risk-based explanation of the value premium and the implications of autocorrelation on portfolio returns.

halima
Télécharger la présentation

Value versus Growth: Stochastic Dominance Criteria

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Value versus Growth: Stochastic Dominance Criteria By Abhay Abhyankar, Keng-Yu Ho, and Huainan Zhao Comments by Shaojun Zhang Nanyang Technological University

  2. Stochastic dominance (I) • Consider two cumulative distribution functions: G and F • First order stochastic dominance of G over F 1 F(z) G(z) 0 z

  3. Stochastic dominance (II) • Consider two cumulative distribution functions: G and F • Second order stochastic dominance of G over F 1 F(z) G(z) 0 z

  4. Stochastic dominance (III) • Consider two cumulative distribution functions: G and F • Third order stochastic dominance of G over F • SD1 => SD2 => SD3 • If G SD1 F, then median of G > or = median of F. • Or if median of G < median of F, then G cannot SD1 F.

  5. Summary statistics Growth Value

  6. Statistical test • Test I: • Test II: • If Test I fails to reject H0 and Test II rejects H0, then G SD1 F. • If both Test I and Test II fails to reject H0, then G and F have no SD1 relation.

  7. Empirical findings • Value portfolios SD(1,2,3) growth portfolios • 1951-2003 • 1963-1990 • Boom periods in 1951-2003 • Boom periods in 1963-1990 • No SD(1,2,3) relation between value and growth portfolios • Recession periods in 1951-2003 • Recession periods in 1963-1990

  8. Comments • Provide additional evidence on the comparison between value and growth stocks, using stochastic dominance criteria. • Value stocks perform better than growth stocks in boom periods, and as well as growth stocks in recession periods. • Lakonishok, Shleifer and Vishny (1994) shows that value stocks outperform growth stocks in recession periods. • Does not provide conclusive evidence for or against the risk-based explanation of value premium. • Barrett and Donald (2003) assume the observations are independently and identically distributed. Returns on value or growth portfolios are serially correlated. How does the autocorrelation influence the test outcome?

More Related