Publication: Linear tests for decreasing absolute risk aversion stochastic dominance
Program
KU-Authors
KU Authors
Co-Authors
Fang, Yi
Kopa, Milos
Advisor
Publication Date
2015
Language
English
Type
Journal Article
Journal Title
Journal ISSN
Volume Title
Abstract
We develop and implement linear formulations of convex stochastic dominance relations based on decreasing absolute risk aversion (DARA) for discrete and polyhedral choice sets. Our approach is based on a piecewise-exponential representation of utility and a local linear approximation to the exponentiation of log marginal utility. An empirical application to historical stock market data suggests that a passive stock market portfolio is DARA stochastic dominance inefficient relative to concentrated portfolios of small-cap stocks. The mean-variance rule and Nth-order stochastic dominance rules substantially underestimate the degree of market portfolio inefficiency because they do not penalize the unfavorable skewness of diversified portfolios, in violation of DARA.
Description
Source:
Management Science
Publisher:
The Institute for Operations Research and the Management Sciences (INFORMS)
Keywords:
Subject
Management, Operations research, Management science