New approximate stochastic dominance approaches for Enhanced Indexation models

Francesco Cesarone and Justo Puerto

Papers from arXiv.org

Abstract: In this paper, we discuss portfolio selection strategies for Enhanced Indexation (EI), which are based on stochastic dominance relations. The goal is to select portfolios that stochastically dominate a given benchmark but that, at the same time, must generate some excess return with respect to a benchmark index. To achieve this goal, we propose a new methodology that selects portfolios using the ordered weighted average (OWA) operator, which generalizes previous approaches based on minimax selection rules and still leads to solving linear programming models. We also introduce a new type of approximate stochastic dominance rule and show that it implies the almost Second-order Stochastic Dominance (SSD) criterion proposed by Lizyayev and Ruszczynski (2012). We prove that our EI model based on OWA selects portfolios that dominate a given benchmark through this new form of stochastic dominance criterion. We test the performance of the obtained portfolios in an extensive empirical analysis based on real-world datasets. The computational results show that our proposed approach outperforms several SSD-based strategies widely used in the literature, as well as the global minimum variance portfolio.

Date: 2024-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://arxiv.org/pdf/2401.12669 Latest version (application/pdf)

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:arx:papers:2401.12669

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().