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Moment Conditions for Almost Stochastic Dominance

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  • Guo, Xu
  • Post, Thierry
  • Wong, Wing-Keung
  • Zhu, Lixing

Abstract

This study establishes necessary conditions for Almost Stochastic Dominance criteria of various orders. These conditions take the form of restrictions on algebraic combinations of moments of the probability distributions in question. The relevant set of conditions depends on the relevant order of ASD but not on the critical value for the admissible violation area. These conditions can help to reduce the information requirement and computational burden in practical applications. A numerical example and an empirical application to historical stock market data illustrate the moment conditions. The first four moment conditions in particular seem appealing for many applications.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51725.

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Date of creation: 26 Nov 2013
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Handle: RePEc:pra:mprapa:51725

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Keywords: decision theory; utility theory; stochastic dominance; necessary conditions; moments.;

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  1. Linton, Oliver & Maasoumi, Esfandiar & Whang, Yoon-Jae, 2003. "Consistent Testing for Stochastic Dominance under General Sampling Schemes," SFB 373 Discussion Papers 2003,31, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, American Economic Association, vol. 69(3), pages 308-17, June.
  3. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(1), pages 3-18, March.
  4. Bali, Turan G. & Demirtas, K. Ozgur & Levy, Haim & Wolf, Avner, 2009. "Bonds versus stocks: Investors' age and risk taking," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(6), pages 817-830, September.
  5. Jean, William H, 1984. " The Harmonic Mean and Other Necessary Conditions for Stochastic Dominance," Journal of Finance, American Finance Association, American Finance Association, vol. 39(2), pages 527-34, June.
  6. Jean, William H, 1980. " The Geometric Mean and Stochastic Dominance," Journal of Finance, American Finance Association, American Finance Association, vol. 35(1), pages 151-58, March.
  7. Moshe Leshno & Haim Levy, 2002. "Preferred by "All" and Preferred by "Most" Decision Makers: Almost Stochastic Dominance," Management Science, INFORMS, INFORMS, vol. 48(8), pages 1074-1085, August.
  8. Timo Kuosmanen, 2004. "Efficient Diversification According to Stochastic Dominance Criteria," Management Science, INFORMS, INFORMS, vol. 50(10), pages 1390-1406, October.
  9. Post, Thierry & Kopa, MiloŇ°, 2013. "General linear formulations of stochastic dominance criteria," European Journal of Operational Research, Elsevier, Elsevier, vol. 230(2), pages 321-332.
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Cited by:
  1. Xu, Guo & Wing-Keung, Wong & Lixing, Zhu, 2013. "Almost Stochastic Dominance for Risk-Averse and Risk-Seeking Investors," MPRA Paper 51744, University Library of Munich, Germany.

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