TY - JOUR
T1 - On the dual test for SSD efficiency. With an application to momentum investment strategies
AU - Post, Thierry
N1 - Funding Information:
Financial support by Tinbergen Institute, Erasmus Research Institute of Management and Erasmus Center of Financial Research is gratefully acknowledged. We thank Philippe Versijp and Pim van Vliet for useful comments and suggestions. Any remaining errors are our own.
PY - 2008/3/16
Y1 - 2008/3/16
N2 - This paper analyzes the dual formulation of Post's [Post, T., 2003. Empirical tests for stochastic dominance efficiency. Journal of Finance 58, 1905-1932] test for second-order stochastic dominance (SSD) efficiency of a given investment portfolio relative to all possible portfolios formed from set of assets. In contrast to the earlier work, we (1) provide a direct proof for the dual that does not rely on expected utility theory, (2) adhere to the original definition of SSD, (3) phrase in terms of a general polyhedral portfolio possibilities set and (4) construct a SSD dominating benchmark portfolio from the optimal solution. To illustrate the dual SSD test, we apply the test to analyze the effect of short-selling restrictions on the profitability of momentum investment strategies.
AB - This paper analyzes the dual formulation of Post's [Post, T., 2003. Empirical tests for stochastic dominance efficiency. Journal of Finance 58, 1905-1932] test for second-order stochastic dominance (SSD) efficiency of a given investment portfolio relative to all possible portfolios formed from set of assets. In contrast to the earlier work, we (1) provide a direct proof for the dual that does not rely on expected utility theory, (2) adhere to the original definition of SSD, (3) phrase in terms of a general polyhedral portfolio possibilities set and (4) construct a SSD dominating benchmark portfolio from the optimal solution. To illustrate the dual SSD test, we apply the test to analyze the effect of short-selling restrictions on the profitability of momentum investment strategies.
KW - Investment analysis
KW - Linear programming
KW - Stochastic dominance
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U2 - 10.1016/j.ejor.2006.08.010
DO - 10.1016/j.ejor.2006.08.010
M3 - Article
AN - SCOPUS:34848915490
SN - 0377-2217
VL - 185
SP - 1564
EP - 1573
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 3
ER -