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Comparison of Moment and Stochastic Dominance Ranking Methods

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  • Jean, William H.

Abstract

Since the appearance in 1969 of Kadar and Russell's paper [1] and in 1970 of Whitmore's paper [4] extending stochastic dominance to the second and third degrees, a considerable interest has developed in stochastic dominance methods as an alternative to moment methods in investment ranking models. The particular attraction of stochastic dominance is that its results are consistent with the expected utility hypothesis without depending on a particular mathematical form of utility function or on a specific type of distribution of investment returns. Although both stochastic dominance ranking models and moment ranking models are based on probability distributions of investment returns, it has been difficult to relate the two types of models mathematically for a complete comparison of results. In this paper the common moments are expressed in terms of successive integrals of a probability density function to allow a systematic comparison of the two methods.

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  • Jean, William H., 1975. "Comparison of Moment and Stochastic Dominance Ranking Methods," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(1), pages 151-161, March.
    • Handle: RePEc:cup:jfinqa:v:10:y:1975:i:01:p:151-161_01
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    Cited by:

    1. Unser, Matthias, 2000. "Lower partial moments as measures of perceived risk: An experimental study," Journal of Economic Psychology, Elsevier, vol. 21(3), pages 253-280, June.
    2. Raymond H. Chan & Ephraim Clark & Xu Guo & Wing-Keung Wong, 2020. "New development on the third-order stochastic dominance for risk-averse and risk-seeking investors with application in risk management," Risk Management, Palgrave Macmillan, vol. 22(2), pages 108-132, June.
    3. repec:kap:iaecre:v:15:y:2009:i:4:p:369-377 is not listed on IDEAS
    4. Horace Ho, 2009. "An Experimental Study of Risk Aversion in Decision-making Under Uncertainty," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 15(4), pages 369-377, November.
    5. Chan, Raymond H. & Chow, Sheung-Chi & Guo, Xu & Wong, Wing-Keung, 2022. "Central moments, stochastic dominance, moment rule, and diversification with an application," Chaos, Solitons & Fractals, Elsevier, vol. 161(C).

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