One recent and promising strategy for Enhanced Indexation is the selection of portfolios that stochastically dominate the benchmark. We propose here a new type of approximate stochastic dominance rule which implies other existing approximate stochastic dominance rules. We then use it to find the portfolio that approximately stochastically dominates a given benchmark with the best possible approximation. Our model is initially formulated as a Linear Program with exponentially many constraints, and then reformulated in a more compact manner so that it can be very efficiently solved in practice. This reformulation also reveals an interesting financial interpretation. We compare our approach with several exact and approximate stochastic dominance models for portfolio selection. An extensive empirical analysis on real and publicly available datasets shows very good out-of-sample performances of our model.

Cesarone, F., Bruni, R., Scozzari, A., Tardella, F. (2017). On Exact and Approximate Stochastic Dominance Strategies for Portfolio Selection. EUROPEAN JOURNAL OF OPERATIONAL RESEARCH, 259(1), 322-329 [10.1016/j.ejor.2016.10.006].

On Exact and Approximate Stochastic Dominance Strategies for Portfolio Selection

CESARONE, FRANCESCO;
2017-01-01

Abstract

One recent and promising strategy for Enhanced Indexation is the selection of portfolios that stochastically dominate the benchmark. We propose here a new type of approximate stochastic dominance rule which implies other existing approximate stochastic dominance rules. We then use it to find the portfolio that approximately stochastically dominates a given benchmark with the best possible approximation. Our model is initially formulated as a Linear Program with exponentially many constraints, and then reformulated in a more compact manner so that it can be very efficiently solved in practice. This reformulation also reveals an interesting financial interpretation. We compare our approach with several exact and approximate stochastic dominance models for portfolio selection. An extensive empirical analysis on real and publicly available datasets shows very good out-of-sample performances of our model.
2017
Cesarone, F., Bruni, R., Scozzari, A., Tardella, F. (2017). On Exact and Approximate Stochastic Dominance Strategies for Portfolio Selection. EUROPEAN JOURNAL OF OPERATIONAL RESEARCH, 259(1), 322-329 [10.1016/j.ejor.2016.10.006].
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11590/307404
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 50
  • ???jsp.display-item.citation.isi??? 48
social impact