Market portfolio efficiency and value stocks

In this journal, Best, Best, and Yoder (2000) recently demonstrated that portfolios of U.S. value stocks dominate portfolios of U.S. growth stocks in terms of second-order stochastic dominance (SSD). We cannot conclude from this finding that the market is SSD inefficient, however, because market portfolio efficiency generally does not require growth portfolios to be efficient. Furthermore, stochastic dominance results are very sensitive to sampling error. In fact, the value-weighted market portfolio is not significantly inefficient, and no significant value effects exist in the sample of Best, Best, and Yoder. This study forms part of a research program on stochastic dominance. Details on the program are available at http://www.few.eur.nl/few/people/gtpost/stochastic_dominance.htm. We appreciate the comments of an anonymous referee. The financial support of Tinbergen Institute, Erasmus Research Institute of Management, and Erasmus Center of Financial Research is gratefully acknowledged. Any remaining errors are the authors' responsibility.