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An improved criterion for almost marginal conditional stochastic dominance

Author

Listed:
  • Wei-Han Liu

    (Southern University of Science and Technology)

  • Jow-Ran Chang

    (National Tsing Hua University)

  • Guo-Jun Yang

    (Haidian District)

Abstract

We contribute to redefining the criteria based on Almost Stochastic Dominance for better portfolio comparison in four ways. First, we refine the first order of Marginal Conditional Stochastic Dominance (Yitzhaki and Olkin in Concentration indices and concentration curves, Vol 19, Lecture notes-monograph series: stochastic orders and decision under risk, 1991; Shalit and Yitzhaki in Manag Sci 40(5):670–684, 1994), which is designed for pairwise asset comparison. Second, we redefine Almost Marginal Conditional Stochastic Dominance (AMCSD) by Denuit et al. (J Bank Finance 41:57–66, 2014) and Chen et al. (Q Rev Econ Finance 85 (C):260–269, 2022), which considers multiple asset changes in a portfolio, especially in the case of second-order stochastic dominance. Our effort secures the hierarchy property (Guo et al. in Econ Lett 121:252–256, 2013) which is absent in previous studies. Third, we extend the analysis of multiple assets and apply our AMCSD definition and Marginal Conditional Stochastic Dominance. Our AMCSD treatment is confirmed to be more appropriate than those in previous study. Finally, for the sake of portfolio risk management, we compose three hypothetical portfolios with option-based indices for empirical analysis. The empirical outcomes support our efforts.

Suggested Citation

  • Wei-Han Liu & Jow-Ran Chang & Guo-Jun Yang, 2024. "An improved criterion for almost marginal conditional stochastic dominance," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1251-1290, April.
    • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:3:d:10.1007_s11156-023-01235-3
    DOI: 10.1007/s11156-023-01235-3
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    References listed on IDEAS

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    More about this item

    Keywords

    Marginal conditional stochastic dominance; Almost stochastic dominance; Asset allocation; Optimal investment; Option-based strategy index;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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