Measuring of Second-Order Stochastic Dominance Portfolio Efficiency

Kopa, Milos

Abstract

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Measuring of Second-Order Stochastic Dominance Portfolio Efficiency

Milos Kopa

Charles University in Prague - Faculty of Mathematics and Physics

January 1, 2010

Kybernetika, Vol. 46, No. 3, pp. 488–500, 2010

Abstract:
In this paper, we deal with second-order stochastic dominance (SSD) portfolio efficiency with respect to all portfolios that can be created from a considered set of assets. Assuming scenario approach for distribution of returns several SSD portfolio efficiency tests were proposed. We introduce a delta-SSD portfolio efficiency approach and we analyze the stability of SSD portfolio efficiency and delta-SSD portfolio efficiency classication with respect to changes in scenarios of returns. We propose new SSD and delta-SSD portfolio efficiency measures as measures of the stability. We derive a non-linear and mixed-integer non-linear programs for evaluating these measures. Contrary to all existing SSD portfolio inefficiency measures, these new measures allow us to compare any two delta-SSD efficient or SSD efficient portfolios.Finally, using historical US stock market data, we compute delta-SSD and SSD portfolio efficiency measures of several SSD efficient portfolios.

Number of Pages in PDF File: 12

Keywords: stochastic dominance, stability, SSD portfolio efficiency measure

JEL Classification: D81, G11

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Date posted: December 29, 2009 ; Last revised: April 29, 2011

Suggested Citation

Kopa, Milos, Measuring of Second-Order Stochastic Dominance Portfolio Efficiency (January 1, 2010). Kybernetika, Vol. 46, No. 3, pp. 488–500, 2010. Available at SSRN: http://ssrn.com/abstract=1471203

Contact Information

Milos Kopa (Contact Author)

Charles University in Prague - Faculty of Mathematics and Physics ( email )

Czech Republic