An improved criterion for almost marginal conditional stochastic dominance

Wei-Han Liu (), Jow-Ran Chang () and Guo-Jun Yang ()
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Wei-Han Liu: Southern University of Science and Technology
Jow-Ran Chang: National Tsing Hua University
Guo-Jun Yang: Haidian District

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 3, No 12, 1290 pages

Abstract: Abstract We contribute to redefining the criteria based on Almost Stochastic Dominance for better portfolio comparison in four ways. First, we refine the first order of Marginal Conditional Stochastic Dominance (Yitzhaki and Olkin in Concentration indices and concentration curves, Vol 19, Lecture notes-monograph series: stochastic orders and decision under risk, 1991; Shalit and Yitzhaki in Manag Sci 40(5):670–684, 1994), which is designed for pairwise asset comparison. Second, we redefine Almost Marginal Conditional Stochastic Dominance (AMCSD) by Denuit et al. (J Bank Finance 41:57–66, 2014) and Chen et al. (Q Rev Econ Finance 85 (C):260–269, 2022), which considers multiple asset changes in a portfolio, especially in the case of second-order stochastic dominance. Our effort secures the hierarchy property (Guo et al. in Econ Lett 121:252–256, 2013) which is absent in previous studies. Third, we extend the analysis of multiple assets and apply our AMCSD definition and Marginal Conditional Stochastic Dominance. Our AMCSD treatment is confirmed to be more appropriate than those in previous study. Finally, for the sake of portfolio risk management, we compose three hypothetical portfolios with option-based indices for empirical analysis. The empirical outcomes support our efforts.

Keywords: Marginal conditional stochastic dominance; Almost stochastic dominance; Asset allocation; Optimal investment; Option-based strategy index (search for similar items in EconPapers)
JEL-codes: D81 G11 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-023-01235-3

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