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We analyze if the value-weighted stock market portfolio is second-order stochastic dominance (SSD) efficient relative to benchmark portfolios formed on size, value, and momentum. In the process, we also develop several methodological improvements to the existing tests for SSD efficiency. Interestingly, the market portfolio is SSD efficient relative to all benchmark sets. By contrast, the market portfolio is inefficient if we replace the SSD criterion with the traditional mean-variance criterion. Combined these results suggests that the mean-variance inefficiency of the market portfolio is caused by the omission of return moments other than variance.Especially downside risk seems to be important for rationalizing asset pricing puzzles in the 1970s and the early 1980s.

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In this paper we examine global tactical asset allocation (GTAA) strategies across a broad range of asset classes. Contrary to market timing for single asset classes and tactical allocation across similar assets, this topic has received little attention in the existing literature. Our main finding is that momentum and value strategies applied to GTAA across twelve asset classes deliver statistically and economically significant abnormal returns. For a long top-quartile and short bottom-quartile portfolio based on a combination of momentum and value signals we find a return of 12% per annum over the 1986-2007 period. Performance is stable over time, also present in an out-of-sample period and sufficiently high to overcome transaction costs in practice. The return cannot be explained by potential structural biases towards asset classes with high risk premiums, nor the Fama French and Carhart hedge factors. We argue that financial markets may be macro inefficient due to insufficient 'smart money' being available to arbitrage mispricing effects away.Free Keywords GTAA, value effect, momentum, global asset allocation Availability The ERIM Report Series is distributed through the following platforms: 2 ABSTRACTIn this paper we examine global tactical asset allocation (GTAA) strategies across a broad range of asset classes. Contrary to market timing for single asset classes and tactical allocation across similar assets, this topic has received little attention in the existing literature. Our main finding is that momentum and value strategies applied to GTAA across twelve asset classes deliver statistically and economically significant abnormal returns. For a long top-quartile and short bottom-quartile portfolio based on a combination of momentum and value signals we find a return of 12% per annum over the 1986-2007 period. Performance is stable over time, also present in an out-of-sample period and sufficiently high to overcome transaction costs in practice. The return cannot be explained by potential structural biases towards asset classes with high risk premiums, nor the Fama French and Carhart hedge factors. We argue that financial markets may be macro inefficient due to insufficient 'smart money' being available to arbitrage mispricing effects away. 3The objective of Global Tactical Asset Allocation (GTAA) is to improve on a given strategic asset allocation by tactically adjusting the weights of asset classes based on their perceived attractiveness. A popular approach to GTAA is to first develop various complementary allocation models, each with a limited scope, that can subsequently be used as building blocks for a comprehensive GTAA strategy. iFor example, one could start with an equity market timing model, and then add a bond market timing model, global country allocation models (both for equities and bonds) and finally a currency allocation model. The next stage entails assigning appropriate risk budgets to each of these models in order to obtain the actual GTAA strategy. For a discussion of a comprehe...