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Fractional stochastic dominance in rank-dependent utility and cumulative prospect theory

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  • Mao, Tiantian
  • Wang, Ruodu

Abstract

Two notions of fractional stochastic dominance (SD) were recently proposed by Müller et al. (2017) and Huang et al. (2020) based on mean-reducing spreads and the coefficient of absolute risk aversion, respectively. We formulate a general class of fractional SD generated by a convex transform, which includes those built from absolute or relative risk aversion as special cases, and this serves as a convenient technical tool for construction of new notions of fractional SD. We obtain equivalent conditions for a preference modeled by rank-dependent utility or cumulative prospect theory to be consistent with each notion of fractional SD. Furthermore, we provide an empirical estimator for the parameters in fractional SD relationships, and we illustrate this with a financial data analysis.

Suggested Citation

  • Mao, Tiantian & Wang, Ruodu, 2022. "Fractional stochastic dominance in rank-dependent utility and cumulative prospect theory," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:mateco:v:103:y:2022:i:c:s0304406822000921
    DOI: 10.1016/j.jmateco.2022.102766
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    Cited by:

    1. Ehsan Azmoodeh & Ozan Hur, 2023. "Multi-fractional Stochastic Dominance: Mathematical Foundations," Papers 2307.08651, arXiv.org.

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