Portfolio Optimization Based on Almost Second-Degree Stochastic Dominance

• 成果类型: Article
• 署名作者: Luo, Chunling; Chen, Piao; Jaillet, Patrick
• 署名单位: Hangzhou Normal University; Zhejiang University; Massachusetts Institute of Technology (MIT); Massachusetts Institute of Technology (MIT)
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2022.01092
• 发表日期: 2025
• 关键词: PORTFOLIO OPTIMIZATION; Almost stochastic dominance; stochastic dominance constraints; quadratically constrained programming; cutting-plane algorithm

摘要

In portfolio optimization, the computational complexity of implementing almost stochastic dominance has limited its practical applications. In this study, we introduce an optimization framework aimed at identifying the optimal portfolio that outperforms a specified benchmark under almost second-degree stochastic dominance (ASSD). Our approach involves discretizing the return range and establishing both sufficient and necessary conditions for ASSD. We then propose a three-step iterative procedure: first, identifying a candidate portfolio; second, assessing its optimality; and third, refining the discretization scheme. Theoretical analysis guarantees that the portfolio identified through this iterative process improves with each iteration, ultimately converging to the optimal solution. Our empirical study, utilizing industry portfolios, demonstrates the efficacy of our approach by consistently identifying an optimal portfolio within a few iterations. Furthermore, comparative analysis against other decision criteria, such as mean-variance, second-degree stochastic dominance, and third-degree stochastic dominance, reveals that ASSD generally leads to portfolios with higher out-of-sample average excess returns but also entails increased variations and risks.