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Almost marginal conditional stochastic dominance
Affiliation:1. Institut de statistique, biostatistique et sciences actuarielles (ISBA), Université Catholique de Louvain, Louvain-la-Neuve, Belgium;2. Graduate Institute of Finance, National Taiwan University of Science and Technology, Taiwan;3. Department of Finance, National Taiwan University, Taiwan;1. School of Economics and Political Science, University of St. Gallen, Switzerland;2. The World Bank and Technical University of Ostrava, Czech Republic;1. Business School, Korea University, Seoul, Republic of Korea;2. Graduate School of Finance, Korea Advanced Institute of Science and Technology (KAIST), Seoul, Republic of Korea;3. Institute of Financial Analysis, University of Neuchatel, Neuchatel, Switzerland;1. KERMIT, Department of Mathematical Modelling, Statistics and Bioinformatics, Ghent University, Belgium;2. Department of Statistics and O.R., University of Oviedo, Spain;3. Department of Mathematics, University of Oviedo, Spain;4. Department of Computer Science, University of Oviedo, Spain;1. Department of Mathematics, Ben-Gurion University of the Negev, 84105 Beer-Sheva, Israel;2. Dipartimento di Matematica, Università degli Studi, Via C. Saldini, 50, 20133 Milano MI, Italy
Abstract:
Marginal Conditional Stochastic Dominance (MCSD) developed by Shalit and Yitzhaki (1994) gives the conditions under which all risk-averse individuals prefer to increase the share of one risky asset over another in a given portfolio. In this paper, we extend this concept to provide conditions under which most (and not all) risk-averse investors behave in this way. Instead of stochastic dominance rules, almost stochastic dominance is used to assess the superiority of one asset over another in a given portfolio. Switching from MCSD to Almost MCSD (AMCSD) helps to reconcile common practices in asset allocation and the decision rules supporting stochastic dominance relations. A financial application is further provided to demonstrate that using AMCSD can indeed improve investment efficiency.
Keywords:Marginal conditional stochastic dominance  Almost stochastic dominance  Asset allocation  Optimal investment
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