Uncovering Latent Stochastic Dominance Relations Using Prior Rankings

32 Pages Posted: 26 Aug 2019 Last revised: 2 Nov 2019

See all articles by Thierry Post

Thierry Post

Graduate School of Business of Nazarbayev University

Rashed Khanjani Shiraz

Iran University of Science and Technology

Date Written: October 31, 2019

Abstract

The discriminatory power of Stochastic Dominance analysis is enhanced using side information about the ranking of external prospects. Restricting risk preferences to be consistent with known rankings strengthens the stochastic order by uncovering latent dominance relations and reducing the number of undominated alternatives. To operationalize the proposed approach, a tractable formulation is derived in terms of linear constraints on the Lower Partial Moments of the distribution functions. Representative applications to wellbeing analysis and portfolio optimization show substantial gains in ordering strength from using plausible side information about the ranking of simple prospects.

Keywords: Stochastic Dominance, Side information, Linear Programming, Wellbeing analysis, Portfolio optimization

JEL Classification: C61, D81, G11

Suggested Citation

Post, Thierry and Khanjani Shiraz, Rashed, Uncovering Latent Stochastic Dominance Relations Using Prior Rankings (October 31, 2019). Available at SSRN: https://ssrn.com/abstract=3442919 or http://dx.doi.org/10.2139/ssrn.3442919

Thierry Post (Contact Author)

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

Rashed Khanjani Shiraz

Iran University of Science and Technology ( email )

Tehran
Iran

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