Sufficient conditions of stochastic dominance for general transformations and its application in option strategy
A counterexample is presented to show that the sufficient condition for one transformation dominating another by the second degree stochastic dominance, proposed by Theorem 5 of Levy (Stochastic dominance and expected utility: Survey and analysis, 1992), does not hold. Then, by restricting the monotone property of the dominating transformation, a revised exact sufficient condition for one transformation dominating another is given. Next, the stochastic dominance criteria, proposed by Meyer (Stochastic dominance and transformations of random variables, 1989) and developed by Levy (1992), are extended to the most general transformations. Moreover, such criteria are further generalized to transformations on discrete random variables. Finally, the authors employ this method to analyze the transformations resulting from holding a stock with the corresponding call option.
Year of publication: |
2018
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Authors: | Gao, Jianwei ; Zhao, Feng ; Gu, Yundong |
Published in: |
Economics: The Open-Access, Open-Assessment E-Journal. - Kiel : Kiel Institute for the World Economy (IfW), ISSN 1864-6042. - Vol. 12.2018, 2018-1, p. 1-15
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Publisher: |
Kiel : Kiel Institute for the World Economy (IfW) |
Subject: | stochastic dominance | transformation | utility theory | option strategy |
Saved in:
freely available
Type of publication: | Article |
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Type of publication (narrower categories): | Article |
Language: | English |
Other identifiers: | 10.5018/economics-ejournal.ja.2018-1 [DOI] 101091376X [GVK] hdl:10419/172956 [Handle] RePEc:zbw:ifweej:20181 [RePEc] |
Classification: | C51 - Model Construction and Estimation ; D81 - Criteria for Decision-Making under Risk and Uncertainty |
Source: |
Persistent link: https://www.econbiz.de/10011777495