Stochastically weighted stochastic dominance concepts with an application in capital budgeting

Jian Hu, Tito Homem-de-Mello and Sanjay Mehrotra

European Journal of Operational Research, 2014, vol. 232, issue 3, 572-583

Abstract: The problem of comparing random vectors arises in many applications. We propose three new concepts of stochastically weighted dominance for comparing random vectors X and Y. The main idea is to use a random vector V to scalarize X and Y as VTX and VTY, and subsequently use available concepts from stochastic dominance and stochastic optimization for comparison. For the case where the distributions of X, Y and V have finite support, we give (mixed-integer) linear inequalities that can be used for random vector comparison as well as for modeling of optimization problems where one of the random vectors depends on decisions to be optimized. Some advantages of the proposed new concepts are illustrated with the help of a capital budgeting example.

Keywords: Stochastic programming; Stochastic dominance; Risk management; Chance constraint; Integer programming (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:232:y:2014:i:3:p:572-583

DOI: 10.1016/j.ejor.2013.08.007

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