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

Yann Braouezec and John Cagnol
Additional contact information
Yann Braouezec: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux]

Post-Print from HAL

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) graphs.

Keywords: Beta distribution; secondorder stochastic dominance; topological closure; lattice structure and Hasse diagram; portfolio choices and exhaustive numerical analysis; Risk analysis (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-upt
Note: View the original document on HAL open archive server: https://hal.science/hal-04373020
References: Add references at CitEc
Citations:

Published in Journal of the Operational Research Society, 2023, 74 (6), pp.1424-1442. ⟨10.1080/01605682.2022.2096500⟩

Downloads: (external link)
https://hal.science/hal-04373020/document (application/pdf)

Related works:
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:hal:journl:hal-04373020

DOI: 10.1080/01605682.2022.2096500

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().