A Stochastic Dominance Approach to Spanning
20 Pages Posted: 26 Aug 2006
Date Written: May 2002 2,
We develop a Stochastic Dominance methodology to analyze if new assets expand theinvestment possibilities for rational nonsatiable and risk-averse investors. This methodologyavoids the simplifying assumptions underlying the traditional mean-variance approach tospanning. The methodology is applied to analyze the stock market behavior of small firms in themonth of January. Our findings suggest that the previously observed January effect isremarkably robust with respect to simplifying assumptions regarding the return distribution.
Keywords: portfolio selection, portfolio evaluation, stochastic dominance, spanning, linear programming
JEL Classification: M, G3, C19
Suggested Citation: Suggested Citation