An empirical analysis of marginal conditional stochastic dominance

Ephraim Clark and Konstantinos Kassimatis

Journal of Banking & Finance, 2012, vol. 36, issue 4, 1144-1151

Abstract: Stochastic dominance is a more general approach to expected utility maximization than the widely accepted mean–variance analysis. However, when applied to portfolios of assets, stochastic dominance rules become too complicated for meaningful empirical analysis, and, thus, its practical relevance has been difficult to establish. This paper develops a framework based on the concept of Marginal Conditional Stochastic Dominance (MCSD), introduced by Shalit and Yitzhaki (1994), to test for the first time the relationship between second order stochastic dominance (SSD) and stock returns. We find evidence that MCSD is a significant determinant of stock returns. Our results are robust with respect to the most popular pricing models.

Keywords: Marginal conditional stochastic dominance; Stock returns; Arbitrage portfolios (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:4:p:1144-1151

DOI: 10.1016/j.jbankfin.2011.11.006

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