Revisiting Markowitz stochastic dominance in international markets

In this paper, we perform Markowitz stochastic dominance (MSD) efficiency tests on several international market indices and their corresponding ETFs against their constituent shares. We focus on major global market indices, such as the S&P500, FTSE 100, DAX 40, and Nikkei 225. We find in a rolling-window analysis that our tests reject MSD efficiency in more than 90% of the cases for indices and ETFs. Therefore, we construct optimal MSD portfolios of constituent stocks and assess their performance against the market indices and ETFs. The out-of-sample empirical results suggest that the optimal portfolios of investors with Markowitz-type preferences outperform both indices and ETFs while generating more than double the values of Sharpe ratios.