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On the relative efficiency of nth order and DARA stochastic dominance rules

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Author Info

  • Antonella Basso
  • Paolo Pianca

Abstract

It is known that third order stochastic dominance implies DARA dominance while no implications exist between higher orders and DARA dominance. A recent contribution points out that, with regard to the problem of determining lower and upper bounds for the price of a financial option, the DARA rule turns out to improve the stochastic dominance criteria of any order. In this paper the relative efficiency of the ordinary stochastic dominance and DARA criteria for alternatives with discrete distributions are compared, in order to see if the better performance of DARA criterion is also suitable for other practical applications. Moreover, the operational use of the stochastic dominance techniques for financial choices is deepened.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/135048697334755
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 4 (1997)
Issue (Month): 4 ()
Pages: 207-222

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Handle: RePEc:taf:apmtfi:v:4:y:1997:i:4:p:207-222

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Related research

Keywords: Stochastic Dominance; Decreasing Absolute Risk Aversion; Financial Efficient Sets; Dynamic Programming;

References

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  1. Vickson, R. G., 1975. "Stochastic Dominance for Decreasing Absolute Risk Aversion," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(05), pages 799-811, December.
  2. Whitmore, G A, 1970. "Third-Degree Stochastic Dominance," American Economic Review, American Economic Association, vol. 60(3), pages 457-59, June.
  3. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
  4. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
  5. Levy, Haim, 1994. "Absolute and Relative Risk Aversion: An Experimental Study," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 289-307, May.
  6. Joy, O. Maurice & Porter, R. Burr, 1974. "Stochastic Dominance and Mutual Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(01), pages 25-31, January.
  7. Antonella Basso & Paolo Pianca, 1997. "Decreasing Absolute Risk Aversion and Option Pricing Bounds," Management Science, INFORMS, vol. 43(2), pages 206-216, February.
  8. Ben-Horim, Moshe, 1990. "Stochastic Dominance and Truncated Sample Data," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 13(2), pages 105-16, Summer.
  9. Hanoch, G & Levy, Haim, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Wiley Blackwell, vol. 36(107), pages 335-46, July.
  10. John S. Hammond, III, 1974. "Simplifying the Choice between Uncertain Prospects Where Preference is Nonlinear," Management Science, INFORMS, vol. 20(7), pages 1047-1072, March.
  11. Jean, William H, 1984. " The Harmonic Mean and Other Necessary Conditions for Stochastic Dominance," Journal of Finance, American Finance Association, vol. 39(2), pages 527-34, June.
  12. Jean, William H, 1980. " The Geometric Mean and Stochastic Dominance," Journal of Finance, American Finance Association, vol. 35(1), pages 151-58, March.
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Cited by:
  1. Basso, Antonella & Funari, Stefania, 2001. "A data envelopment analysis approach to measure the mutual fund performance," European Journal of Operational Research, Elsevier, vol. 135(3), pages 477-492, December.

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