Portfolio Choice Based on Third-Degree Stochastic Dominance

• 成果类型: Article
• 署名作者: Post, Thierry; Kopa, Milos
• 署名单位: Koc University; Charles University Prague
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2016.2506
• 发表日期: 2017
• 页码: 3381-3392
• 关键词: portfolio choice; stochastic dominance; quadratic programming; enhanced indexing; industry momentum

摘要

We develop an optimization method for constructing investment portfolios that dominate a given benchmark portfolio in terms of third-degree stochastic dominance. Our approach relies on the properties of the semivariance function, a refinement of an existing superconvex dominance condition, and quadratic constrained programming. We apply our method to historical stock market data using an industry momentum strategy. Our enhanced portfolio generates important performance improvements compared with alternatives based on mean-variance dominance and second-degree stochastic dominance. Relative to the Center for Research in Security Prices all-share index, our portfolio increases average out-of-sample return by almost seven percentage points per annum without incurring more downside risk, using quarterly rebalancing and without short selling.