Interval-based stochastic dominance: theoretical framework and application to portfolio choices

Jia Liu (), Zhiping Chen () and Giorgio Consigli ()
Additional contact information
Jia Liu: Xi’an Jiaotong University
Zhiping Chen: Xi’an Jiaotong University
Giorgio Consigli: Khalifa University of Science and Technology

Annals of Operations Research, 2021, vol. 307, issue 1, No 16, 329-361

Abstract: Abstract We introduce a new stochastic dominance relationship, the interval-based stochastic dominance (ISD). By choosing different reference points, we show that ISD may span a continuum of preferences between kth and $$(k+1)$$ ( k + 1 ) th order stochastic dominance (SD). We distinguish accordingly between interval-based (or shortly just interval) SD of order 1 and of order 2: the former spanning from first- to second-order stochastic dominance, the latter from second- to third-order stochastic dominance. By examining the relationships between interval-based SD and SD, as well as between ISD and risk measures or utility functions, we frame the concept within decision theory and clarify its implications when applied to an optimal financial allocation problem. The formulation of ISD-constrained problems in the presence of discrete random variables is discussed in detail and applied to a portfolio selection problem.

Keywords: Stochastic dominance; Bi-criteria decision making; Portfolio selection; Reference point (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s10479-021-04231-9 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:annopr:v:307:y:2021:i:1:d:10.1007_s10479-021-04231-9

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-021-04231-9

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().