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

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  • 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.

Suggested Citation

  • Antonella Basso & Paolo Pianca, 1997. "On the relative efficiency of nth order and DARA stochastic dominance rules," Applied Mathematical Finance, Taylor & Francis Journals, vol. 4(4), pages 207-222.
  • Handle: RePEc:taf:apmtfi:v:4:y:1997:i:4:p:207-222 DOI: 10.1080/135048697334755
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    References listed on IDEAS

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    1. Whitmore, G A, 1970. "Third-Degree Stochastic Dominance," American Economic Review, American Economic Association, pages 457-459.
    2. 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.
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    8. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
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    11. Ben-Horim, Moshe, 1990. "Stochastic Dominance and Truncated Sample Data," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 105-116, Summer.
    12. Antonella Basso & Paolo Pianca, 1997. "Decreasing Absolute Risk Aversion and Option Pricing Bounds," Management Science, INFORMS, pages 206-216.
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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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