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Journal of Banking & Finance Vol. 41 2014

Almost marginal conditional stochastic dominance

Michel Denuit1; Rachel J. Huang2; Larry Y. Tzeng3; Christine W. Wang3

1 UCLouvain · 2 National Taiwan University of Science and Technology · 3 National Taiwan University

Abstract

Marginal Conditional Stochastic Dominance (MCSD) developed by Shalit and Yitzhaki (1994) gives the conditions under which all risk-averse individuals prefer to increase the share of one risky asset over another in a given portfolio. In this paper, we extend this concept to provide conditions under which most (and not all) risk-averse investors behave in this way. Instead of stochastic dominance rules, almost stochastic dominance is used to assess the superiority of one asset over another in a given portfolio. Switching from MCSD to Almost MCSD (AMCSD) helps to reconcile common practices in asset allocation and the decision rules supporting stochastic dominance relations. A financial application is further provided to demonstrate that using AMCSD can indeed improve investment efficiency.

DOI
10.1016/j.jbankfin.2013.12.014
Volume
41
Pages
57-66
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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