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Is the index efficient?: A worldwide tour with stochastic dominance

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Article number100660
<mark>Journal publication date</mark>30/06/2022
<mark>Journal</mark>Journal of Financial Markets
Issue numberPart B
Publication StatusPublished
Early online date27/05/22
<mark>Original language</mark>English


We conduct a broad study of stochastic dominance efficiency on financial markets. We show that in the long run the vast majority of 17 equity market indices across the globe are inefficient at order two relative to their industry components. In the short run, the past stochastic dominance relation between the index and sub-indices predicts future dominance. Trading rules accounting for the predictability of stochastic dominance improve the out-of-sample certainty equivalents of risk-averse investors. The gains are especially pronounced for European and developing markets, while no consistent outperformance of alternative strategies is found for the S&P 100 and Nikkei 225 indices.

Bibliographic note

Author was employed at another UK HEI at the time of submission and was deposited at University of Manchester Repository, see link https://research.manchester.ac.uk/en/publications/is-the-index-efficient-a-worldwide-tour-with-stochastic-dominance