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Portfolio selection with second order uncertain dominance constraint

Author

Listed:
  • Xiaoxia Huang

    (University of Science and Technology Beijing)

  • Xue Meng

    (University of Science and Technology Beijing)

  • Xiaozhu Xu

    (University of Science and Technology Beijing)

Abstract

This paper proposes an uncertain mean-second order dominance model in the framework of uncertainty theory. By giving mean-expected utility equivalent, we show that the proposed model is suitable for rational and risk-averse investors because the portfolio produced by the model can give the investors the maximum expected return and in the meantime bring the investors expected utility value equal to or higher than the reference return no matter what specific utility functions the investors may take. By offering deterministic equivalents and comparing them with the uncertain mean-variance and uncertain mean-risk index models, we clarify the advantages of the proposed model, i.e., being easier to use and safer in investment. Furthermore, we give a numerical example and some experiments to illustrate the application of the model and the advantages of it.

Suggested Citation

  • Xiaoxia Huang & Xue Meng & Xiaozhu Xu, 2024. "Portfolio selection with second order uncertain dominance constraint," Fuzzy Optimization and Decision Making, Springer, vol. 23(4), pages 561-575, December.
    • Handle: RePEc:spr:fuzodm:v:23:y:2024:i:4:d:10.1007_s10700-024-09433-x
    DOI: 10.1007/s10700-024-09433-x
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    References listed on IDEAS

    as
    1. Yang Liu & Baoding Liu, 2022. "Residual analysis and parameter estimation of uncertain differential equations," Fuzzy Optimization and Decision Making, Springer, vol. 21(4), pages 513-530, December.
    2. Huang, Xiaoxia & Yang, Tingting, 2020. "How does background risk affect portfolio choice: An analysis based on uncertain mean-variance model with background risk," Journal of Banking & Finance, Elsevier, vol. 111(C).
    3. Ji, Xinzhi & Guo, Ranran & Ye, Wuyi, 2024. "Adjustable light robust optimization with second order stochastic dominance constraints," The North American Journal of Economics and Finance, Elsevier, vol. 73(C).
    4. Xiangfeng Yang & Baoding Liu, 2019. "Uncertain time series analysis with imprecise observations," Fuzzy Optimization and Decision Making, Springer, vol. 18(3), pages 263-278, September.
    5. Xiangfeng Yang & Hua Ke, 2023. "Uncertain interest rate model for Shanghai interbank offered rate and pricing of American swaption," Fuzzy Optimization and Decision Making, Springer, vol. 22(3), pages 447-462, September.
    6. Moriggia, Vittorio & Kopa, Miloš & Vitali, Sebastiano, 2019. "Pension fund management with hedging derivatives, stochastic dominance and nodal contamination," Omega, Elsevier, vol. 87(C), pages 127-141.
    7. Kallio, Markku & Dehghan Hardoroudi, Nasim, 2018. "Second-order stochastic dominance constrained portfolio optimization: Theory and computational tests," European Journal of Operational Research, Elsevier, vol. 264(2), pages 675-685.
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