Almost marginal conditional stochastic dominance

Michel M. Denuit, Rachel J. Huang, Larry Y. Tzeng, Christine W. Wang

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

Marginal Conditional Stochastic Dominance (MCSD) developed by Shalit and Yitzhaki (1994) gives the conditions under which all risk-averse individuals prefer to increase the share of one risky asset over another in a given portfolio. In this paper, we extend this concept to provide conditions under which most (and not all) risk-averse investors behave in this way. Instead of stochastic dominance rules, almost stochastic dominance is used to assess the superiority of one asset over another in a given portfolio. Switching from MCSD to Almost MCSD (AMCSD) helps to reconcile common practices in asset allocation and the decision rules supporting stochastic dominance relations. A financial application is further provided to demonstrate that using AMCSD can indeed improve investment efficiency.

Original languageEnglish
Pages (from-to)57-66
Number of pages10
JournalJournal of Banking and Finance
Volume41
Issue number1
DOIs
StatePublished - Apr 2014

Keywords

  • Almost stochastic dominance
  • Asset allocation
  • Marginal conditional stochastic dominance
  • Optimal investment

Fingerprint

Dive into the research topics of 'Almost marginal conditional stochastic dominance'. Together they form a unique fingerprint.

Cite this