Portfolio Choice Models Based on Second-Order Stochastic Dominance Measures: An Overview and a Computational Study

Fábián, Csaba I.; Mitra, Gautam; Roman, Diana; Zverovich, Victor; Vajnai, T.; Csizmás, Edit

doi:10.1007/978-1-4419-9586-5_18

Cited by 5 publications

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Long-term individual financial planning under stochastic dominance constraints

2019

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We analyse an optimal households' asset-liability management (ALM) problem formulated as a goal-based problem in which the family aims over an extended planning horizon at achieving an investment goal, in the form of a real-estate investment and a retirement goal at the end of the planning horizon. The problem is formulated as a multistage stochastic program (MSP) and we evaluate in this article the impact of second order stochastic dominance (SSD) constraints on different specifications of the family objective functions and with respect to three alternative benchmark policies adopted to generate the SSD constraint set. The problem is formulated as a linear stochastic program and, following Kopa et al. ( 2018) the SSD constraints are based on a simple permuation matrix, whose effectiveness in determining the decision maker strategies is confirmed in a case study developed in the second part of the article. We show that depending on the adopted benchmark policy, SSD feasibility even if far away on the planning horizon may influence root node decisions and affect both the adopted investment and the liability optimal policies. Interestingly, SSD feasibility, depending benchmark policy may also imply first-oder stochastic dominance (FSD). Finally we analyse in the article from a qualitative viewpoint the relationship between a minimum shortfall

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