A Characterization of the SSD-Efficient Frontier of Portfolio Weights with an Application to SSD-Spanning
26 Pages Posted: 22 Nov 2015
Date Written: September 23, 2014
In this paper it is shown how the set of all portfolios which are second-order stochastic dominance efficient can be characterized by using a series of mixed-integer linear constrains. Our derivation employs a combination of the first-order conditions of the utility maximization problem together with a judicious use of binary variables. Our main result is illustrated by presenting a theoretical and empirical application, which tackles in a general way spanning and intersection in the context of SSD-efficiency.
Keywords: stochastic dominance, mixed-integer linear programming, portfolio theory, spanning, intersection
JEL Classification: C61, G10, G11
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