Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5088938 | Journal of Banking & Finance | 2014 | 10 Pages |
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.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Michel M. Denuit, Rachel J. Huang, Larry Y. Tzeng, Christine W. Wang,