Empirically testing for the location–scale condition: a review of the economic literature

Michael Vassalos and Carl R. Dillon and Paul D. Childs

Journal of Risk Model Validation

Abstract: ABSTRACT An interesting strand of the applied economic literature considers the conditions that are required for two major theories of economic decisions under uncertainty, mean-variance and expected utility to be consistent with each other. One of these conditions is the location-scale (LS) parameter condition. If the LS condition can be verified, there is a clear sense in which a mean-variance approach, which assumes a portfolio variance as the risk measure, will be validated.

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