Stochastic dominance analysis of Asian hedge funds

Wong, Wing Keung; Phoon, Kok Fai; Lean, Hooi Hooi

doi:10.1016/j.pacfin.2007.07.001

Cited by 129 publications

(31 citation statements)

References 74 publications

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“…However, Wong et al (2008) have shown that if FSD exists statistically, arbitrage opportunities may not exist, but investors can increase their expected utilities, as well as their expected wealth, but not their wealth if they shift from holding the dominated asset to the dominant one. In this paper, we call this situation "expected arbitrage opportunity" or "arbitrage opportunity in expectation"; this means that if X OD Y appears many times and if investors could buy X and short sell Y each time, then on average, they could not only increase their expected utility, but also increase their expected wealth.…”

Section: Arbitrage Opportunity and Anomalymentioning

confidence: 99%

Stochastic Dominance and Omega Ratio: Measures to Examine Market Efficiency, Arbitrage Opportunity, and Anomaly

2017

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Both stochastic dominance and Omegaratio can be used to examine whether the market is efficient, whether there is any arbitrage opportunity in the market and whether there is any anomaly in the market. In this paper, we first study the relationship between stochastic dominance and the Omega ratio. We find that second-order stochastic dominance (SD) and/or second-order risk-seeking SD (RSD) alone for any two prospects is not sufficient to imply Omega ratio dominance insofar that the Omega ratio of one asset is always greater than that of the other one. We extend the theory of risk measures by proving that the preference of second-order SD implies the preference of the corresponding Omega ratios only when the return threshold is less than the mean of the higher return asset. On the other hand, the preference of the second-order RSD implies the preference of the corresponding Omega ratios only when the return threshold is larger than the mean of the smaller return asset. Nonetheless, first-order SD does imply Omega ratio dominance. Thereafter, we apply the theory developed in this paper to examine the relationship between property size and property investment in the Hong Kong real estate market. We conclude that the Hong Kong real estate market is not efficient and there are expected arbitrage opportunities and anomalies in the Hong Kong real estate market. Our findings are useful for investors and policy makers in real estate.

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Section: Arbitrage Opportunity and Anomalymentioning

confidence: 99%

Stochastic Dominance and Omega Ratio: Measures to Examine Market Efficiency, Arbitrage Opportunity, and Anomaly

2017

Self Cite

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“…Hence, one could expect signi…cant di¤erences between the SD e¢ cient index and the mean-variance e¢ cient index when more realistic assumptions are made concerning the distributions of the di¤erent components. SD is attractive because it is e¤ectively nonparametric as no explicit speci…cation of a utility function or probability distribution functional form is required (Post 2003;Post and Versijb 2007;Wong et al 2008;Scaillet and Topaloglou 2010). In addition, the entire probability density function is taken into account rather than a …nite number of moments so it can be considered less restrictive and more robust.…”

Section: Tests For Sd E¢ Ciency Of Di¤erent Indicesmentioning

confidence: 99%

Measuring world governance: revisiting the institutions hypothesis

Pinar

2014

Empir Econ

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We consider the weighting scheme that results in a best-case scenario in the construction of the World Governance Indicators (WGIs), a proxy of institutional quality. To do that we use an approach that relies on consistent tests for stochastic dominance e¢ ciency of a given index with respect to all possible indices constructed from a set of individual components. The test statistics and the estimators are computed using mixed integer programming methods. The results show that the equally-weighted (…xed weights) composite WGI index is not the best-case scenario and that governance indicators at di¤erent years should be weighted di¤erently. Furthermore, we revisit the institutions hypothesis in the empirical growth literature, where institutional quality is the main determinant of long term development. We …nd that not only institutions matter for economic development, but also geography and macroeconomic policies do a¤ect economic development directly. JEL Classi…cations: C12; C13; C14; C15; O1; O57

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“…Portfolio optimization in the presence of such non-normality generally leads to very different portfolio allocations than those implied by mean-variance analysis (see, for example, McFall Lamm, 2003;Fung & Hsieh, 1997b;Cvitanic et al, 2003;Terhaar et al, 2003;Popova et al,. 2003;Glaffig, 2006;Wong et al, 2008). Motivated by the well established volatility clustering in hedge fund returns, Giamouridis & Vrontos (2007) show that the use of multivariate conditional volatility models improves portfolio performance and provides a more accurate tool for tail-risk measurement.…”

Section: Introductionmentioning

confidence: 99%

Dynamic hedge fund portfolio construction: A semi-parametric approach

Harris

Mazibas

2013

Journal of Banking & Finance

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In this paper, we evaluate alternative optimization frameworks for constructing portfolios of hedge funds. Using monthly hedge fund index returns for the period 1990 to 2011, we compare the standard mean-variance optimization model with models based on CVaR, CDaR and Omega, for both conservative and aggressive hedge fund investment strategies. In order to implement the CVaR, CDaR and Omega optimization models, we propose a semiparametric methodology, in which we first model the marginal density of each hedge fund index using extreme value theory and construct the joint density of hedge fund index returns using a copula-based approach. We then simulate hedge fund returns from this joint density in order to compute CVaR, CDaR and Omega, which are used in the optimization process. We compare the semi-parametric approach with the standard, non-parametric approach, in which the quantiles of the marginal density of portfolio returns are estimated empirically and used to compute CVaR, CDaR and Omega. We report two main findings. The first is that the CVaR, CDaR and Omega models offer a significant improvement in terms of risk-adjusted portfolio performance over the mean-variance model. The second is that semi-parametric estimation of the CVaR, CDaR and Omega models offers a very substantial improvement over non-parametric estimation. Our results are robust to the choice of target return, risk limit and estimation sample size.

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Stochastic dominance analysis of Asian hedge funds

Cited by 129 publications

References 74 publications

Stochastic Dominance and Omega Ratio: Measures to Examine Market Efficiency, Arbitrage Opportunity, and Anomaly

Stochastic Dominance and Omega Ratio: Measures to Examine Market Efficiency, Arbitrage Opportunity, and Anomaly

Measuring world governance: revisiting the institutions hypothesis

Dynamic hedge fund portfolio construction: A semi-parametric approach

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