Linear Tests for Decreasing Absolute Risk Aversion Stochastic Dominance

• 成果类型: Article
• 署名作者: Post, Thierry; Fang, Yi; Kopa, Milos
• 署名单位: Koc University; Jilin University; Jilin University; Charles University Prague
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2014.1960
• 发表日期: 2015
• 页码: 1615-1629
• 关键词: Stochastic dominance; UTILITY THEORY; decreasing absolute risk aversion; linear programming; bootstrapping; market portfolio efficiency; Pricing kernel; skewness

摘要

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.