Fractional stochastic dominance in rank-dependent utility and cumulative prospect theory

Tiantian Mao and Ruodu Wang

Journal of Mathematical Economics, 2022, vol. 103, issue C

Abstract: Two notions of fractional stochastic dominance (SD) were recently proposed by Müller et al. (2017) and Huang et al. (2020) based on mean-reducing spreads and the coefficient of absolute risk aversion, respectively. We formulate a general class of fractional SD generated by a convex transform, which includes those built from absolute or relative risk aversion as special cases, and this serves as a convenient technical tool for construction of new notions of fractional SD. We obtain equivalent conditions for a preference modeled by rank-dependent utility or cumulative prospect theory to be consistent with each notion of fractional SD. Furthermore, we provide an empirical estimator for the parameters in fractional SD relationships, and we illustrate this with a financial data analysis.

Keywords: Stochastic dominance; Risk aversion; Risk measures; Rank-dependent utility; Cumulative prospect theory (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:103:y:2022:i:c:s0304406822000921

DOI: 10.1016/j.jmateco.2022.102766

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