Almost marginal conditional stochastic dominance
AbstractMarginal 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.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 41 (2014)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/jbf
Marginal conditional stochastic dominance; Almost stochastic dominance; Asset allocation; Optimal investment;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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