IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/75027.html
   My bibliography  Save this paper

First Stochastic Dominance and Risk Measurement

Author

Listed:
  • Niu, Cuizhen
  • Wong, Wing-Keung
  • Zhu, Lixing

Abstract

Farinelli and Tibiletti (2008) propose a general risk-reward performance measurement ratio. Due to its simplicity and generality, the F-T ratios have gained much attentions. F-T ratios are ratios of average gains to average losses with respect to a target, each raised by some power index. Omega ratio and Upside Potential ratio are both special cases of F-T ratios. In this paper, we establish the consistency of F-T ratios with respect to first-order stochastic dominance. It is shown that second-order stochastic dominance is not consistent to the F-T ratios. This point is illustrated by a simple example.

Suggested Citation

  • Niu, Cuizhen & Wong, Wing-Keung & Zhu, Lixing, 2016. "First Stochastic Dominance and Risk Measurement," MPRA Paper 75027, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:75027
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/75027/1/MPRA_paper_75027.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60(2), pages 151-151.
    2. Chan, Chia-Ying & de Peretti, Christian & Qiao, Zhuo & Wong, Wing-Keung, 2012. "Empirical test of the efficiency of the UK covered warrants market: Stochastic dominance and likelihood ratio test approach," Journal of Empirical Finance, Elsevier, vol. 19(1), pages 162-174.
    3. Ogryczak, Wlodzimierz & Ruszczynski, Andrzej, 1999. "From stochastic dominance to mean-risk models: Semideviations as risk measures," European Journal of Operational Research, Elsevier, vol. 116(1), pages 33-50, July.
    4. Zhuo Qiao & Wing-Keung Wong, 2015. "Which is a better investment choice in the Hong Kong residential property market: a big or small property?," Applied Economics, Taylor & Francis Journals, vol. 47(16), pages 1670-1685, April.
    5. Chun-Kei Tsang & Wing-Keung Wong & Ira Horowitz, 2016. "Arbitrage opportunities, efficiency, and the role of risk preferences in the Hong Kong property market," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 33(4), pages 735-754, October.
    6. Broll, Udo & Guo, Xu & Welzel, Peter & Wong, Wing-Keung, 2015. "The banking firm and risk taking in a two-moment decision model," Economic Modelling, Elsevier, vol. 50(C), pages 275-280.
    7. João Paulo Vieito & Wing-Keung Wong & Zhen-Zhen Zhu, 2016. "Could the global financial crisis improve the performance of the G7 stocks markets?," Applied Economics, Taylor & Francis Journals, vol. 48(12), pages 1066-1080, March.
    8. Farinelli, Simone & Tibiletti, Luisa, 2008. "Sharpe thinking in asset ranking with one-sided measures," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1542-1547, March.
    9. Haim Levy, 1992. "Stochastic Dominance and Expected Utility: Survey and Analysis," Management Science, INFORMS, vol. 38(4), pages 555-593, April.
    10. Egozcue, Martin & Wong, Wing-Keung, 2010. "Gains from diversification on convex combinations: A majorization and stochastic dominance approach," European Journal of Operational Research, Elsevier, vol. 200(3), pages 893-900, February.
    11. Wong, Wing-Keung, 2007. "Stochastic dominance and mean-variance measures of profit and loss for business planning and investment," European Journal of Operational Research, Elsevier, vol. 182(2), pages 829-843, October.
    12. Ma, Chenghu & Wong, Wing-Keung, 2010. "Stochastic dominance and risk measure: A decision-theoretic foundation for VaR and C-VaR," European Journal of Operational Research, Elsevier, vol. 207(2), pages 927-935, December.
    13. Ephraim Clark & Zhuo Qiao & Wing-Keung Wong, 2016. "Theories Of Risk: Testing Investor Behavior On The Taiwan Stock And Stock Index Futures Markets," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 907-924, April.
    14. Wing-Keung Wong & Chenghu Ma, 2008. "Preferences over location-scale family," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(1), pages 119-146, October.
    15. Bai, Zhidong & Phoon, Kok Fai & Wang, Keyan & Wong, Wing-Keung, 2013. "The performance of commodity trading advisors: A mean-variance-ratio test approach," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 188-201.
    16. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
    17. Zhidong Bai & Yongchang Hui & Wing-Keung Wong & Ričardas Zitikis, 2012. "Prospect Performance Evaluation: Making a Case for a Non-asymptotic UMPU Test," Journal of Financial Econometrics, Oxford University Press, vol. 10(4), pages 703-732, September.
    18. G. Hanoch & H. Levy, 1969. "The Efficiency Analysis of Choices Involving Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(3), pages 335-346.
    19. Guo, Xu & Wong, Wing-Keung, 2016. "Multivariate Stochastic Dominance for Risk Averters and Risk Seekers," MPRA Paper 70637, University Library of Munich, Germany.
    20. Yi-Chein Chiang & Mei-Chu Ke & Tung Liang Liao & Cin-Dian Wang, 2012. "Are technical trading strategies still profitable? Evidence from the Taiwan Stock Index Futures Market," Applied Financial Economics, Taylor & Francis Journals, vol. 22(12), pages 955-965, June.
    21. Fong, Wai Mun & Wong, Wing Keung & Lean, Hooi Hooi, 2005. "International momentum strategies: a stochastic dominance approach," Journal of Financial Markets, Elsevier, vol. 8(1), pages 89-109, February.
    22. Johannes Leitner, 2005. "A Short Note On Second‐Order Stochastic Dominance Preserving Coherent Risk Measures," Mathematical Finance, Wiley Blackwell, vol. 15(4), pages 649-651, October.
    23. Fong, Wai Mun & Lean, Hooi Hooi & Wong, Wing Keung, 2008. "Stochastic dominance and behavior towards risk: The market for Internet stocks," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 194-208, October.
    24. Wong, Wing-Keung, 2007. "Stochastic dominance and mean-variance measures of profit and loss for business planning and investment," European Journal of Operational Research, Elsevier, vol. 182(2), pages 829-843, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Niu, Cuizhen & Wong, Wing-Keung & Xu, Qunfang, 2017. "Higher-Order Risk Measure and (Higher-Order) Stochastic Dominance," MPRA Paper 75948, University Library of Munich, Germany.
    2. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Decision Sciences, Economics, Finance, Business, Computing, And Big Data: Connections," Advances in Decision Sciences, Asia University, Taiwan, vol. 22(1), pages 36-94, December.
    3. Alghalith, Moawia & Niu, Cuizhen & Wong, Wing-Keung, 2017. "The impacts of joint energy and output prices uncertainties in a mean-variance framework," MPRA Paper 79739, University Library of Munich, Germany.
    4. Chang, C-L. & McAleer, M.J. & Wong, W.-K., 2018. "Decision Sciences, Economics, Finance, Business, Computing, and Big Data: Connections," Econometric Institute Research Papers 18-024/III, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    5. Xu Guo & Xuejun Jiang & Wing-Keung Wong, 2017. "Stochastic Dominance and Omega Ratio: Measures to Examine Market Efficiency, Arbitrage Opportunity, and Anomaly," Economies, MDPI, vol. 5(4), pages 1-16, October.
    6. Cuizhen Niu & Wing-Keung Wong & Qunfang Xu, 2017. "Kappa ratios and (higher-order) stochastic dominance," Risk Management, Palgrave Macmillan, vol. 19(3), pages 245-253, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Decision Sciences, Economics, Finance, Business, Computing, and Big Data: Connections," Tinbergen Institute Discussion Papers 18-024/III, Tinbergen Institute.
    2. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Decision Sciences, Economics, Finance, Business, Computing, And Big Data: Connections," Advances in Decision Sciences, Asia University, Taiwan, vol. 22(1), pages 36-94, December.
    3. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Big Data, Computational Science, Economics, Finance, Marketing, Management, and Psychology: Connections," JRFM, MDPI, vol. 11(1), pages 1-29, March.
    4. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2016. "Management science, economics and finance: A connection," Documentos de Trabajo del ICAE 2016-07, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    5. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Big Data, Computational Science, Economics, Finance, Marketing, Management, and Psychology: Connections," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 11(1), pages 1-29, March.
    6. Nguyen Huu Hau & Tran Trung Tinh & Hoa Anh Tuong & Wing-Keung Wong, 2020. "Review of Matrix Theory with Applications in Education and Decision Sciences," Advances in Decision Sciences, Asia University, Taiwan, vol. 24(1), pages 28-69, March.
    7. Cuizhen Niu & Wing-Keung Wong & Qunfang Xu, 2017. "Kappa ratios and (higher-order) stochastic dominance," Risk Management, Palgrave Macmillan, vol. 19(3), pages 245-253, August.
    8. Kim-Hung Pho & Thi Diem-Chinh Ho & Tuan-Kiet Tran & Wing-Keung Wong, 2019. "Moment Generating Function, Expectation And Variance Of Ubiquitous Distributions With Applications In Decision Sciences: A Review," Advances in Decision Sciences, Asia University, Taiwan, vol. 23(2), pages 65-150, June.
    9. Niu, Cuizhen & Wong, Wing-Keung & Xu, Qunfang, 2017. "Higher-Order Risk Measure and (Higher-Order) Stochastic Dominance," MPRA Paper 75948, University Library of Munich, Germany.
    10. Zhihui Lv & Amanda M. Y. Chu & Wing Keung Wong & Thomas C. Chiang, 2021. "The maximum-return-and-minimum-volatility effect: evidence from choosing risky and riskless assets to form a portfolio," Risk Management, Palgrave Macmillan, vol. 23(1), pages 97-122, June.
    11. Kim-Hung Pho & Tuan-Kiet Tran & Thi Diem-Chinh Ho & Wing-Keung Wong, 2019. "Optimal Solution Techniques in Decision Sciences A Review," Advances in Decision Sciences, Asia University, Taiwan, vol. 23(1), pages 114-161, March.
    12. Xu Guo & Cuizhen Niu & Wing-Keung Wong, 2019. "Farinelli and Tibiletti ratio and stochastic dominance," Risk Management, Palgrave Macmillan, vol. 21(3), pages 201-213, September.
    13. Wing-Keung Wong & Hooi Hooi Lean & Michael McAleer & Feng-Tse Tsai, 2018. "Why Are Warrant Markets Sustained in Taiwan but Not in China?," Sustainability, MDPI, vol. 10(10), pages 1-17, October.
    14. Zhidong Bai & Hua Li & Michael McAleer & Wing-Keung Wong, 2015. "Stochastic dominance statistics for risk averters and risk seekers: an analysis of stock preferences for USA and China," Quantitative Finance, Taylor & Francis Journals, vol. 15(5), pages 889-900, May.
    15. Wing-Keung Wong & Hooi Hoi Lean & Michael McAleer & Feng-Tse Tsai, 2018. "Why did Warrant Markets Close in China but not Taiwan?," Tinbergen Institute Discussion Papers 18-051/III, Tinbergen Institute.
    16. Ephraim Clark & Zhuo Qiao & Wing-Keung Wong, 2016. "Theories Of Risk: Testing Investor Behavior On The Taiwan Stock And Stock Index Futures Markets," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 907-924, April.
    17. Ng, Pin & Wong, Wing-Keung & Xiao, Zhijie, 2017. "Stochastic dominance via quantile regression with applications to investigate arbitrage opportunity and market efficiency," European Journal of Operational Research, Elsevier, vol. 261(2), pages 666-678.
    18. Broll, Udo & Wong, Wing-Keung & Wu, Mojia, 2013. "Banking Firm and Two-Moment Decision Making," MPRA Paper 51687, University Library of Munich, Germany.
    19. Fathi Abid & Pui Lam Leung & Mourad Mroua & Wing Keung Wong, 2014. "International Diversification Versus Domestic Diversification: Mean-Variance Portfolio Optimization and Stochastic Dominance Approaches," JRFM, MDPI, vol. 7(2), pages 1-22, May.
    20. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2013. "Risk-averse and Risk-seeking Investor Preferences for Oil Spot and Futures," Documentos de Trabajo del ICAE 2013-31, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico, revised Aug 2013.

    More about this item

    Keywords

    Stochastic Dominance; Upside Potential Ratio; Farinelli and Tibiletti ratio.;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:75027. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.