IDEAS home Printed from https://ideas.repec.org/a/taf/apmtfi/v4y1997i4p207-222.html
   My bibliography  Save this article

On the relative efficiency of nth order and DARA stochastic dominance rules

Author

Listed:
  • Antonella Basso
  • Paolo Pianca

Abstract

It is known that third order stochastic dominance implies DARA dominance while no implications exist between higher orders and DARA dominance. A recent contribution points out that, with regard to the problem of determining lower and upper bounds for the price of a financial option, the DARA rule turns out to improve the stochastic dominance criteria of any order. In this paper the relative efficiency of the ordinary stochastic dominance and DARA criteria for alternatives with discrete distributions are compared, in order to see if the better performance of DARA criterion is also suitable for other practical applications. Moreover, the operational use of the stochastic dominance techniques for financial choices is deepened.

Suggested Citation

  • Antonella Basso & Paolo Pianca, 1997. "On the relative efficiency of nth order and DARA stochastic dominance rules," Applied Mathematical Finance, Taylor & Francis Journals, vol. 4(4), pages 207-222.
    • Handle: RePEc:taf:apmtfi:v:4:y:1997:i:4:p:207-222
    DOI: 10.1080/135048697334755
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/135048697334755
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/135048697334755?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. R. G. Vickson, 1975. "Stochastic Dominance Tests for Decreasing Absolute Risk Aversion. I. Discrete Random Variables," Management Science, INFORMS, vol. 21(12), pages 1438-1446, August.
    2. Jean, William H, 1980. "The Geometric Mean and Stochastic Dominance," Journal of Finance, American Finance Association, vol. 35(1), pages 151-158, March.
    3. Levy, Haim, 1994. "Absolute and Relative Risk Aversion: An Experimental Study," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 289-307, May.
    4. Vickson, R. G. & Altmann, M., 1977. "On the Relative Effectiveness of Stochastic Dominance Rules: Extension to Decreasingly Risk-Averse Utility Functions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(1), pages 73-84, March.
    5. Joy, O. Maurice & Porter, R. Burr, 1974. "Stochastic Dominance and Mutual Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(1), pages 25-31, January.
    6. Whitmore, G A, 1970. "Third-Degree Stochastic Dominance," American Economic Review, American Economic Association, vol. 60(3), pages 457-459, June.
    7. Vickson, R. G., 1975. "Stochastic Dominance for Decreasing Absolute Risk Aversion," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(5), pages 799-811, December.
    8. G. Hanoch & H. Levy, 1969. "The Efficiency Analysis of Choices Involving Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(3), pages 335-346.
    9. Moshe Ben-Horim, 1990. "Stochastic Dominance And Truncated Sample Data," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 105-116, June.
    10. John S. Hammond, III, 1974. "Simplifying the Choice between Uncertain Prospects Where Preference is Nonlinear," Management Science, INFORMS, vol. 20(7), pages 1047-1072, March.
    11. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
    12. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
    13. William H. Jean & Billy P. Helms, 1988. "Necessary conditions for stochastic dominance: A general approach," Applied Stochastic Models and Data Analysis, John Wiley & Sons, vol. 4(2), pages 89-99, June.
    14. Jean, William H, 1984. "The Harmonic Mean and Other Necessary Conditions for Stochastic Dominance," Journal of Finance, American Finance Association, vol. 39(2), pages 527-534, June.
    15. Ben-Horim, Moshe, 1990. "Stochastic Dominance and Truncated Sample Data," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 105-116, Summer.
    16. Thistle, Paul D., 1993. "Negative Moments, Risk Aversion, and Stochastic Dominance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(2), pages 301-311, June.
    17. Kearns, Richard B. & Burgess, Richard C., 1979. "An Effective Algorithm for Estimating Stochastic Dominance Efficient Sets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(3), pages 547-552, September.
    18. Antonella Basso & Paolo Pianca, 1997. "Decreasing Absolute Risk Aversion and Option Pricing Bounds," Management Science, INFORMS, vol. 43(2), pages 206-216, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Basso, Antonella & Funari, Stefania, 2001. "A data envelopment analysis approach to measure the mutual fund performance," European Journal of Operational Research, Elsevier, vol. 135(3), pages 477-492, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Thierry Post & Miloš Kopa, 2017. "Portfolio Choice Based on Third-Degree Stochastic Dominance," Management Science, INFORMS, vol. 63(10), pages 3381-3392, October.
    2. Courtois, Olivier Le & Xu, Xia, 2023. "Semivariance below the maximum: Assessing the performance of economic and financial prospects," Journal of Economic Behavior & Organization, Elsevier, vol. 209(C), pages 185-199.
    3. Fang, Yi & Post, Thierry, 2017. "Higher-degree stochastic dominance optimality and efficiency," European Journal of Operational Research, Elsevier, vol. 261(3), pages 984-993.
    4. Thorlund-Petersen, Lars, 2001. "Third-degree stochastic dominance and axioms for a convex marginal utility function," Mathematical Social Sciences, Elsevier, vol. 41(2), pages 167-199, March.
    5. Zentner, Robert P. & Greene, Duty D. & Hickenbotham, Terry L. & Eidman, Vernon R., 1981. "Ordinary And Generalized Stochastic Dominance: A Primer," Staff Papers 14184, University of Minnesota, Department of Applied Economics.
    6. Thierry Post & Milos Kopa, 2015. "Portfolio Choice based on Third-degree Stochastic Dominance, With an Application to Industry Momentum," Koç University-TUSIAD Economic Research Forum Working Papers 1527, Koc University-TUSIAD Economic Research Forum.
    7. Thierry Post & Yi Fang & Miloš Kopa, 2015. "Linear Tests for Decreasing Absolute Risk Aversion Stochastic Dominance," Management Science, INFORMS, vol. 61(7), pages 1615-1629, July.
    8. Loubergé, Henri & Malevergne, Yannick & Rey, Béatrice, 2020. "New Results for additive and multiplicative risk apportionment," Journal of Mathematical Economics, Elsevier, vol. 90(C), pages 140-151.
    9. M. Maheen & S. Resia Beegam, 2023. "Application of Nonparametric Stochastic Dominance Approach in the Performance Evaluation of Indian Mutual Funds," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 21(3), pages 663-680, September.
    10. Eeckhoudt, Louis & Schlesinger, Harris & Tsetlin, Ilia, 2009. "Apportioning of risks via stochastic dominance," Journal of Economic Theory, Elsevier, vol. 144(3), pages 994-1003, May.
    11. Kaplanski, Guy & Kroll, Yoram, 2002. "VaR Risk Measures versus Traditional Risk Measures: an Analysis and Survey," MPRA Paper 80070, University Library of Munich, Germany.
    12. 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.
    13. Christian Gollier & Miles S. Kimball, 2018. "New methods in the classical economics of uncertainty: comparing risks," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 5-23, May.
    14. Osuna, Edgar Elias, 2012. "Crossing points of distributions and a theorem that relates them to second order stochastic dominance," Statistics & Probability Letters, Elsevier, vol. 82(4), pages 758-764.
    15. Andrey Lizyayev, 2012. "Stochastic dominance efficiency analysis of diversified portfolios: classification, comparison and refinements," Annals of Operations Research, Springer, vol. 196(1), pages 391-410, July.
    16. W. Wong & R. Chan, 2008. "Prospect and Markowitz stochastic dominance," Annals of Finance, Springer, vol. 4(1), pages 105-129, January.
    17. Post, G.T., 2001. "Testing for Stochastic Dominance with Diversification Possibilities," ERIM Report Series Research in Management ERS-2001-38-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    18. 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.
    19. Xu, Guo & Wing-Keung, Wong & Lixing, Zhu, 2013. "Almost Stochastic Dominance for Risk-Averse and Risk-Seeking Investors," MPRA Paper 51744, University Library of Munich, Germany.
    20. Thierry Post & Valerio Potì, 2017. "Portfolio Analysis Using Stochastic Dominance, Relative Entropy, and Empirical Likelihood," Management Science, INFORMS, vol. 63(1), pages 153-165, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:4:y:1997:i:4:p:207-222. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAMF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.