Improved Portfolio Choice using Second-Order Stochastic Dominance

James E. Hodder (), Jens Carsten Jackwerth () and Olga Kolokolova ()
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James E. Hodder: University of Wisconsin-Madinson
Jens Carsten Jackwerth: Department of Economics, University of Konstanz, Germany
Olga Kolokolova: University of Manchester, United Kingdom

No 2010-14, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: We examine the use of second-order stochastic dominance as both a way to measure performance and also as a technique for constructing portfolios. Using in-sample data, we construct portfolios such that their second-order stochastic dominance over a typical pension fund benchmark is most probable. The empirical results based on 21 years of daily data suggest that this portfolio choice technique significantly outperforms the benchmark portfolio out-of-sample. As a preference-free technique it will also suit any risk-averse investor in e.g. a pension fund. Moreover, its out-of-sample performance across eight different measures is superior to widely discussed portfolio choice approaches such as equal weights, mean variance, and minimum-variance methods.

Keywords: second-order stochastic dominance; portfolio choice; portfolio measurement (search for similar items in EconPapers)
JEL-codes: G G11 G12 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2010-11-11
New Economics Papers: this item is included in nep-ore
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Journal Article: Improved Portfolio Choice Using Second-Order Stochastic Dominance (2015)
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