Central Moments, Stochastic Dominance, Moment Rule, and Diversification

2 Pages Posted: 7 Aug 2019 Last revised: 1 Jun 2020

See all articles by Raymond Honfu Chan

Raymond Honfu Chan

City University of Hong Kong

Sheung Chi Chow

Australian National University (ANU)

Xu Guo

Beijing Normal University (BNU)

Wing-Keung Wong

Asia University, Department of Finance

Date Written: August 4, 2019

Abstract

In this paper, we develop some properties to state the relationships between the central moments and stochastic dominance for both the general utility functions and the polynomial utility functions. This leads to draw preferences of both risk averters and risk seekers on their choices of assets with different moments. In addition, we extend the mean-variance (mv) rule to get the moment rule which counts all moments in the decision. We apply the theory to portfolio diversification.

Keywords: Stochastic dominance, central moments, expected-utility maximization, risk aversion, risk seeking, investment behaviors, moment rule

JEL Classification: C00, G11

Suggested Citation

Chan, Raymond Honfu and Chow, Sheung Chi and Guo, Xu and Wong, Wing-Keung, Central Moments, Stochastic Dominance, Moment Rule, and Diversification (August 4, 2019). Available at SSRN: https://ssrn.com/abstract=3431903 or http://dx.doi.org/10.2139/ssrn.3431903

Raymond Honfu Chan

City University of Hong Kong ( email )

Tat Chee Avenue
Hong Kong
Hong Kong

Sheung Chi Chow

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Xu Guo

Beijing Normal University (BNU)

19 Xinjiekou Outer St
Haidian District
Beijing, Guangdong 100875
China

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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