1. Comparing SSD-Efficient Portfolios with a Skewed Reference Distribution
- Author
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Francesco Cesarone, Raffaello Cesetti, Giuseppe Orlando, Manuel Luis Martino, Jacopo Maria Ricci, Cesarone, Francesco, Cesetti, Raffaello, Orlando, Giuseppe, Martino, Manuel Lui, and Ricci, Jacopo Maria
- Subjects
General Mathematics ,Computer Science (miscellaneous) ,stochastic dominance,portfolio optimization, reference distribution, skewness, multiasset investment ,stochastic dominance ,portfolio optimization ,reference distribution ,skewness ,multiasset investment ,Engineering (miscellaneous) - Abstract
Portfolio selection models based on second-order stochastic dominance (SSD) have the advantage of providing portfolios that reflect the behavior of risk-averse investors without the need to specify the utility function. Several scholars apply SSD conditions with respect to a reference distribution, typically that of the market index, to find its dominant SSD portfolio. However, since the reference distribution could strongly influence asset allocation, in this article, we compare two SSD-based portfolio selection strategies with a reshaping of the reference distribution in terms of its skewness and, consequently, its variance. Through an extensive empirical analysis based on multiasset investment universes, we empirically show that the SSD portfolios dominating the new skewed benchmark index generally perform better.
- Published
- 2022