Dominance-Based Decision Rules for Pension Fund Selection under Different Distributional Assumptions

Abstract

The pension landscape is changing due to the market situation, and technological change has enabled financial innovations. Pension savers usually seek financial advice to make a personalised decision in selecting the right pension fund for them. As such, decision rules based on the assumed risk profile of the decision maker could be generated by making use of stochastic dominance (SD). In the paper, the second-pillar pension funds operating in Lithuania and Slovakia are analysed according to SD rules. The importance of the distributional assumption is explored while comparing the results of empirical, student-t, Hyperbolic and Normal Inverse Gaussian distributions to generate SD-based rules that could be integrated into an advisory solution. Moreover, due to the differences in SD results under different distributional assumptions, a new SD ratio is proposed that condenses the dominance-based relations for all considered dominance orders and probability distributions. The empirical results indicate that this new SD ratio efficiently characterises not only the preference of each fund individually but also of a group of funds with the same attributes, thus enabling multi-risk and multi-country comparisons.

Review of Multi-Criteria Decision-Making Methods in Finance Using Explainable Artificial Intelligence

“…MCDA and MCDM involve the application of decision-making methods by financial decision-makers in cases in which it is necessary to take into account various contradictory decision-making criteria. MCDA methods have been applied to many financial problems, such as credit scoring and failure prediction (Ferreira et al, 2014 ; Angilella and Mazzù, 2015 ), portfolio selection and management (Ehrgott et al, 2004 ; Aouni et al, 2018 ), assessment of corporate performance (Bai et al, 2014 ), investment appraisal (Lowe et al, 2002 ), and choosing funds for asset investment (Kabašinskas et al, 2019 , 2020 ).…”

“…Stochastic dominance (SD) permits efficient or inefficient securities to be identified. One of the possibilities for integrating SD-based decision-making rules is the development of robo-advisory solutions to many financial problems (see Kabašinskas et al, 2020 ).…”