Stochastic Dominance Efficiency Tests under Diversification

Timo Kuosmanen

Finance from University Library of Munich, Germany

Abstract: This paper focuses on Stochastic Dominance (SD) efficiency in a finite empirical panel data. We analytically characterize the sets of unsorted time series that dominate a given evaluated distribution by the First, Second, and Third order SD. Using these insights, we develop simple Linear Programming and 0-1 Mixed Integer Linear Programming tests of SD efficiency. The advantage to the earlier efficiency tests is that the proposed approach explicitly accounts for diversification. Allowing for diversification can both improve the power of the empirical SD tests, and enable SD based portfolio optimization. A simple numerical example illustrates the SD efficiency tests. Discussion on the application potential and the future research directions concludes.

Keywords: Stochastic Dominance; Protfolio Choice; Efficiency; Diversification; Mathematical Programming (search for similar items in EconPapers)
JEL-codes: C14 C61 D81 G11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2001-05-18
Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on HP; pages: 31 ; figures: included
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0105001

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