A note on optimal portfolios under regime–switching

Markus Haas

Finance Research Letters, 2016, vol. 19, issue C, 209-216

Abstract: This paper extends the stochastic dominance rules for normal mixture distributions derived by Levy and Kaplanski (2015). First, the portfolios under consideration are allowed to follow different regime-switching processes. Second, the results are extended from second- to fourth-order stochastic dominance, which is known to be closely related to kurtosis aversion in financial markets and allows to compare mixture distributions with the same overall variance. In particular, when a risk-free asset is available, checking for fourth-order stochastic dominance turns out to amount to a comparison of the regime-specific and overall Sharpe ratios of the portfolios under consideration.

Keywords: Portfolio selection; Regime–switching; Sharpe ratio; Stochastic dominance (search for similar items in EconPapers)
JEL-codes: C46 C58 G11 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:19:y:2016:i:c:p:209-216

DOI: 10.1016/j.frl.2016.08.001

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