Comparing SSD-Efficient Portfolios with a Skewed Reference Distribution

Francesco Cesarone, Raffaello Cesetti, Giuseppe Orlando, Manuel Luis Martino and Jacopo Maria Ricci
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Francesco Cesarone: Department of Business Studies, Roma Tre University, 00145 Roma, Italy
Raffaello Cesetti: Department of Business Studies, Roma Tre University, 00145 Roma, Italy
Manuel Luis Martino: Department of Business Studies, Roma Tre University, 00145 Roma, Italy
Jacopo Maria Ricci: Department of Economics, University of Bergamo, 24127 Bergamo, Italy

Mathematics, 2022, vol. 11, issue 1, 1-20

Abstract: Portfolio selection models based on second-order stochastic dominance (SSD) have the advantage of providing portfolios that reflect the behavior of risk-averse investors without the need to specify the utility function. Several scholars apply SSD conditions with respect to a reference distribution, typically that of the market index, to find its dominant SSD portfolio. However, since the reference distribution could strongly influence asset allocation, in this article, we compare two SSD-based portfolio selection strategies with a reshaping of the reference distribution in terms of its skewness and, consequently, its variance. Through an extensive empirical analysis based on multiasset investment universes, we empirically show that the SSD portfolios dominating the new skewed benchmark index generally perform better.

Keywords: stochastic dominance; portfolio optimization; reference distribution; skewness; multiasset investment (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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