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Asymptotic Multivariate Dominance: A Financial Application

Author

Listed:
  • Sergio Ortobelli Lozza

    (University of Bergamo
    VŠB- Technical University of Ostrava)

  • Tommaso Lando

    (University of Bergamo
    VŠB- Technical University of Ostrava)

  • Filomena Petronio

    (VŠB- Technical University of Ostrava)

  • Tomáš Tichý

    (VŠB- Technical University of Ostrava)

Abstract

We propose a multivariate stochastic dominance relation aimed at ranking different financial markets/sectors from the point of view of a non-satiable risk averse investor. In particular, we assume that the vector of returns of a given market is in the domain of attraction of a symmetric stable Paretian law in order to take into account the asymptotic behaviour of the financial returns. We determine the stochastic dominance rule for stable symmetric distributions, where the stability parameter plays a crucial role. Consequently, the multivariate rule for ordering markets is based on a comparison between i) location parameters, ii) dispersion parameters, and iii) stability indices. Finally, we apply the method to the equity markets of the four countries with the highest gross domestic product in 2013, namely, the US, China, Japan and Germany. In this empirical comparison we examine the ex ante and ex post dominance between stock markets, either assuming that the returns are jointly (or conditionally, for a robust approach) Gaussian distributed, or in the domain of attraction of a stable sub-Gaussian law.

Suggested Citation

  • Sergio Ortobelli Lozza & Tommaso Lando & Filomena Petronio & Tomáš Tichý, 2016. "Asymptotic Multivariate Dominance: A Financial Application," Methodology and Computing in Applied Probability, Springer, vol. 18(4), pages 1097-1115, December.
    • Handle: RePEc:spr:metcap:v:18:y:2016:i:4:d:10.1007_s11009-016-9502-y
    DOI: 10.1007/s11009-016-9502-y
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    Cited by:

    1. Noureddine Kouaissah & Amin Hocine, 2021. "Forecasting systemic risk in portfolio selection: The role of technical trading rules," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(4), pages 708-729, July.
    2. Kouaissah, Noureddine, 2023. "Robust reward-risk performance measures with weakly second-order stochastic dominance constraints," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 53-62.
    3. Kouaissah, Noureddine, 2021. "Using multivariate stochastic dominance to enhance portfolio selection and warn of financial crises," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 480-493.

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