Linear tests for decreasing absolute risk aversion stochastic dominance

• Autores: Thierry Post, Yi Fang, Milo� Kopa
• Localización: Management science: journal of the Institute for operations research and the management sciences, ISSN 0025-1909, Vol. 61, Nº. 7, 2015, págs. 1615-1629
• Idioma: inglés
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• Resumen

  • 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.