Stochastic dominance and expected utility: survey and analysis

Article Abstract:

The concept of stochastic dominance (SD) is increasingly being used in such areas as economics, finance, statistics and operations research. Scholastic papers on the theory of stochastic dominance are reviewed, particularly those that came out since the 1980s. The review covered several issues, including SD rules and nonlinear utility theory, first degree stochastic and arbitrage, SD rules in relation to the definition of risk, and the effectiveness and algorithms of SD rules. The SD framework was found to be weakest when applied to the area of finance, mainly because of the absence of the appropriate SD efficient set of diversification strategies.

Literature, Stochastic processes

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Market reaction to quarterly earnings' announcements: a stochastic dominance based test of market efficiency

Article Abstract:

The Stochastic Dominance criteria are used as an alternative to the Capital Asset Pricing model for research on market efficiency. The market reactions to quarterly earnings announcements during the 24 quarters beginning October 1962, are used to demonstrate the Stochastic Dominance technique. Results indicate that there were no market reaction differences between the first and second 12-month periods and that the market was efficient throughout the entire study period.

Stochastic analysis, Financial statements, Capital assets pricing model, Capital asset pricing model

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A parametric approach to stochastic dominance: the lognormal case

Article Abstract:

Stochastic dominance regulations (SDRs) for lending and borrowing are developed for a mix of risk and riskless assets. These regulations are easily used for discrete distributions. Nevertheless, an endless amount of comparisons are involved as the distributions being evaluated are constant. For a small group of comparisons a technique is available that can be used based on SDR criteria.

Management science, Models, Analysis, Risk assessment, Stochastic differential equations, Distribution (Probability theory)

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