A lattice approach to the Beta distribution induced by stochastic dominance: Theory and applications

Yann Braouezec and John Cagnol

Journal of the Operational Research Society, 2023, vol. 74, issue 6, 1424-1442

Abstract: We provide a comprehensive analysis of the two-parameter Beta distributions seen from the perspective of second-order stochastic dominance. By changing its parameters through a bijective mapping, we work with a bounded subset D instead of an unbounded plane. We show that a mean-preserving spread is equivalent to an increase of the variance, which means that higher moments are irrelevant to compare the riskiness of Beta distributions. We then derive the lattice structure induced by second-order stochastic dominance, which is feasible thanks to the topological closure of D. Finally, we consider a standard (expected-utility based) portfolio optimization problem in which its inputs are the parameters of the Beta distribution. We explicitly characterize the subset of D for which the optimal solution consists of investing 100% of the wealth in the risky asset and we provide an exhaustive numerical analysis of this optimal solution through (color-coded) graph.

Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/01605682.2022.2096500 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: A lattice approach to the Beta distribution induced by stochastic dominance: Theory and applications (2023)
Working Paper: A lattice approach to the Beta distribution induced by stochastic dominance: Theory and applications (2021)
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:taf:tjorxx:v:74:y:2023:i:6:p:1424-1442

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/tjor20

DOI: 10.1080/01605682.2022.2096500

Access Statistics for this article

Journal of the Operational Research Society is currently edited by Tom Archibald

More articles in Journal of the Operational Research Society from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().