Mean-Variance and Stochastic Dominance Analysis of Global Exchange-Traded Funds

46 Pages Posted: 14 Apr 2016

See all articles by Zhen-Zhen Zhu

Zhen-Zhen Zhu

Northeast Normal University

Wing-Keung Wong

Asia University, Department of Finance

Kok Fai Phoon

SIM University

Date Written: April 11, 2016

Abstract

We employ the stochastic dominance (SD) approach that utilizes the entire return distribution to rank the performance of exchange-traded funds as traditional mean-variance and CAPM approaches may be inappropriate given the nature of non-normal returns. We find second and third-order stochastic dominance relationships amongst the assets and conclude that by investing in higher-order dominant funds, risk-averse investors can maximize their expected utilities but not their wealth. In addition, we find the common characteristic for most pairs of funds is that one fund is preferred to another in the negative domain whereas the preference reverses in the positive domain. We conclude that the stochastic dominance approach is more appropriate compared with traditional approaches as a filter in exchange-traded fund selection. Compared with traditional approaches, the SD approach, not only is assumption free, but also provides greater insights to the performance and risk inherent in an exchange-traded fund’s track record.

Keywords: exchange-traded funds, stochastic dominance, risk-averse investors, performance measurement

JEL Classification: G11, G15

Suggested Citation

Zhu, Zhen-Zhen and Wong, Wing-Keung and Phoon, Kok Fai, Mean-Variance and Stochastic Dominance Analysis of Global Exchange-Traded Funds (April 11, 2016). Available at SSRN: https://ssrn.com/abstract=2762252 or http://dx.doi.org/10.2139/ssrn.2762252

Zhen-Zhen Zhu

Northeast Normal University

Changchun
China

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

Kok Fai Phoon

SIM University ( email )

School of Business
461 Clementi Road
Singapore, 599491
Singapore

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