Almost marginal conditional stochastic dominance

Michel M. Denuit, Rachel Huang (), Larry Y. Tzeng and Christine W. Wang

Journal of Banking & Finance, 2014, vol. 41, issue C, 57-66

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 (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Almost marginal conditional stochastic dominance (2014)
Working Paper: Almost Marginal Conditional Stochastic Dominance (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:41:y:2014:i:c:p:57-66

DOI: 10.1016/j.jbankfin.2013.12.014

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