Stochastic Dominance (SSD)

Subset second-order stochastic dominance for enhanced indexation with diversification enforced by sector constraints ArXiv ID: 2404.16777 “View on arXiv” Authors: Unknown Abstract In this paper we apply second-order stochastic dominance (SSD) to the problem of enhanced indexation with asset subset (sector) constraints. The problem we consider is how to construct a portfolio that is designed to outperform a given market index whilst having regard to the proportion of the portfolio invested in distinct market sectors. In our approach, subset SSD, the portfolio associated with each sector is treated in a SSD manner. In other words in subset SSD we actively try to find sector portfolios that SSD dominate their respective sector indices. However the proportion of the overall portfolio invested in each sector is not pre-specified, rather it is decided via optimisation. Our subset SSD approach involves the numeric solution of a multivariate second-order stochastic dominance problem. Computational results are given for our approach as applied to the S&P500 over the period 3rd October 2018 to 29th December 2023. This period, over 5 years, includes the Covid pandemic, which had a significant effect on stock prices. The S&P500 data that we have used is made publicly available for the benefit of future researchers. Our computational results indicate that the scaled version of our subset SSD approach outperforms the S&P500. Our approach also outperforms the standard SSD based approach to the problem. Our results show, that for the S&P500 data considered, including sector constraints improves out-of-sample performance, irrespective of the SSD approach adopted. Results are also given for Fama-French data involving 49 industry portfolios and these confirm the effectiveness of our subset SSD approach. ...

New approximate stochastic dominance approaches for Enhanced Indexation models ArXiv ID: 2401.12669 “View on arXiv” Authors: Unknown Abstract In this paper, we discuss portfolio selection strategies for Enhanced Indexation (EI), which are based on stochastic dominance relations. The goal is to select portfolios that stochastically dominate a given benchmark but that, at the same time, must generate some excess return with respect to a benchmark index. To achieve this goal, we propose a new methodology that selects portfolios using the ordered weighted average (OWA) operator, which generalizes previous approaches based on minimax selection rules and still leads to solving linear programming models. We also introduce a new type of approximate stochastic dominance rule and show that it implies the almost Second-order Stochastic Dominance (SSD) criterion proposed by Lizyayev and Ruszczynski (2012). We prove that our EI model based on OWA selects portfolios that dominate a given benchmark through this new form of stochastic dominance criterion. We test the performance of the obtained portfolios in an extensive empirical analysis based on real-world datasets. The computational results show that our proposed approach outperforms several SSD-based strategies widely used in the literature, as well as the global minimum variance portfolio. ...