Portfolio Selection Using Stochastic Dominance Criteria

McNamara, J. Regis

doi:10.1111/j.1540-5915.1998.tb00877.x

Cited by 26 publications

(13 citation statements)

References 21 publications

(20 reference statements)

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“…These days, it is popular to apply SD to explain financial theories and anomalies; see, for example, McNamara (1998), Post and Levy (2005), Fong et al (2005), Broll et al (2006), Wong et al (2008), and Lean et al (2010). So far, most of the literature only examine the preference of risk averters in their studies.…”

Section: Discussionmentioning

confidence: 99%

Test statistics for prospect and Markowitz stochastic dominances with applications

Bai

Liu

et al. 2011

The Econometrics Journal

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Summary Levy and Levy (2002, 2004) extend the stochastic dominance (SD) theory for risk averters and risk seekers by developing the prospect SD (PSD) and Markowitz SD (MSD) theory for investors with S‐shaped and reverse S‐shaped (RS‐shaped) utility functions, respectively. Davidson and Duclos (2000) develop SD tests for risk averters whereas Sriboonchitra et al. (2009) modify their statistics to obtain SD tests for risk seekers. In this paper, we extend their work by developing new statistics for both PSD and MSD of the first three orders. These statistics provide a tool to examine the preferences of investors with S‐shaped utility functions proposed by Kahneman and Tversky (1979) in their prospect theory and investors with RS‐shaped investors proposed by Markowitz (1952a). We also derive the limiting distributions of the test statistics to be stochastic processes. In addition, we propose a bootstrap method to decide the critical points of the tests and prove the consistency of the bootstrap tests. To illustrate the applicability of our proposed statistics, we apply them to study the preferences of investors with the corresponding S‐shaped and RS‐shaped utility functions vis‐à‐vis returns on iShares and vis‐à‐vis returns of traditional stocks and Internet stocks before and after the Internet bubble.

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Section: Discussionmentioning

confidence: 99%

Test statistics for prospect and Markowitz stochastic dominances with applications

Bai

Liu

et al. 2011

The Econometrics Journal

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“…So far, all believe that the reason behind this outcome is that the "optimal" return is formed by a combination of returns from an extremely large number of assets (see McNamara [1998]). Use of Markowitz optimisation procedure efficiently depends on whether the expected return and the covariance matrix can be estimated accurately.…”

Section: Results For German Equity Marketmentioning

confidence: 99%

Tail Event Driven ASset allocation: evidence from equity and mutual funds’ markets

et al. 2017

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“…Then, G(X) dominates F(X) by First Degree Stochastic Dominance (FSD), if G(X) is preferred to F(X) by all decisions makers with increasing utility functions u' 0  . Necessary and sufficient conditions for G(X) to dominate F(X) by FSD are (Levy, 1992 ;McNamara, 1998):…”

Section: First Degree Stochastic Dominance Criterionmentioning

confidence: 99%

“…The quadratic form of utility function is not consistent with observed behavior and implies increasing absolute risk aversion. Stochastic dominance is most commonly applied in finance and the economics of uncertainty (Levy, 2006) and it is advantageous because it accommodates skewness and other data irregularities and permit more general assumptions about the utility function of the decision maker (McNamara, 1998). Wilde et.…”

Section: Introductionmentioning

confidence: 99%

Economic Viability and Selection of Irrigation Systems Using Simulation and Stochastic Dominance

Duenhas¹,

Saad²

2009

R_I

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ECONOMIC VIABILITY AND SELECTION OF IRRIGATION SYSTEMS USING SIMULATION AND STOCHASTIC DOMINANCE Luiza Helena Duenhas1 ; João Carlos Cury Saad21Conselho Nacional de Desenvolvimento Científico e Tecnológico, Brasília, DF, luizad@cnpq.br2Departamento de Engenharia Rural, Faculdade de Ciências Agronômicas, Universidade Estadual Paulista, Botucatu, SP 1 SUMMARY In humid areas, irrigation systems are used to increase the crop yield. The selection of irrigation system to be used is a decision made under uncertainty. This paper shows a procedure that is an association betweenMonte Carlosimulation method and the criterion of Stochastic Dominance to analyze the viability and identify the best economic option under risk condition. To illustrate the applicability of the procedure, three types of irrigation systems are evaluated to be used in a citrus orchard inSao Paulo State,Brazil. The irrigation systems evaluated are: drip, microirrigation, and traveling sprinkler. The decision indicator is the present value of net benefit associated with the increase of yield obtained with the irrigation system adopted. TheMonte Carlosimulation method is used to generate the cumulative distribution of the present value for each one of the irrigation systems. These curves allow to analyze the economic viability of the three irrigation systems. According to the First Degree Stochastic Dominance, traveling sprinkler system was the best alternative with 95.7% probability of obtaining a positive present value. The second best option was the microirrigation with 82.7% and the worst result (57.3%) was obtained with drip irrigation. KEYWORDS: Economic viability, simulation, irrigation systems, stochastic dominance, citrus. 1DUENHAS, L. H. ; 2SAAD, J. C. C. VIABILIDADE ECONÔMICA E SELEÇÃO DE SISTEMAS DE IRRIGAÇÃO UTILIZANDO SIMULAÇÃO E DOMINÂNCIA ESTOCÁSTICA 2 RESUMO Em regiões úmidas, sistemas de irrigação são utilizados para aumentar a produtividade das culturas. A escolha do sistema de irrigação a ser utilizado é uma decisão feita sob incertezas. Este trabalho apresenta um procedimento que associa o método de simulação de Monte Carlos e o critério de Dominância Estocástica para analisar a viabilidade e identificar a melhor opção econômica sob condição de risco. Para exemplificar a aplicabilidade do procedimento, três sistemas de irrigação são avaliados para uso em pomar de citros no Estado de São Paulo, Brasil. Os sistemas de irrigação avaliados são: gotejamento, microaspersão e autopropelido. O indicador de decisão é o valor presente do lucro associado com o aumento de produtividade obtido com a adoção da irrigação. O método de simulação de Monte Carlos é utilizado para gerar a distribuição acumulada do valor presente para cada sistema de irrigação avaliado. Estas curvas permitem analisar a viabilidade econômica dos três sistemas de irrigação. De acordo com o primeiro grau de dominância estocástica, o sistema autopropelido foi a melhor alternativa com 95,7% de probabilidade de obtenção de valor presente positivo. A segunda melhor opção foi a microaspersão com 82,7% e a terceira escolha foi o gotejamento com 57,3%. UNITERMOS: viabilidade, simulação, sistemas de irrigação, dominância estocástica, citros.

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Portfolio Selection Using Stochastic Dominance Criteria

Cited by 26 publications

References 21 publications

Test statistics for prospect and Markowitz stochastic dominances with applications

Test statistics for prospect and Markowitz stochastic dominances with applications

Tail Event Driven ASset allocation: evidence from equity and mutual funds’ markets

Economic Viability and Selection of Irrigation Systems Using Simulation and Stochastic Dominance

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