stochastic dominance theory for location-scale family随机优势理论location-scale家庭.pdf

STOCHASTIC DOMINANCE THEORY FOR LOCATION-SCALE FAMILY WING-KEUNG WONG Received 17 January 2006; Revised 1 August 2006; Accepted 2 August 2006 Meyer (1987) extended the theory of mean-variance criterion to include the compari- son among distributions that differ only by location and scale parameters and to include general utility functions with only convexity or concavity restrictions. In this paper, we make some comments on Meyer’s paper and extend the results from Tobin (1958) that the indifference curve is convex upwards for risk averters, concave downwards for risk lovers, and horizontal for risk neutral investors to include the general conditions stated by Meyer (1987). We also provide an alternative proof for the theorem. Levy (1989) extended Meyer’s results by introducing some inequality relationships between the stochastic- dominance and the mean-variance efficient sets. In this paper, we comment on Levy’s findings and show that these relationships do not hold in certain situations. We further develop some properties among the first- and second-degree stochastic dominance effi- cient sets and the mean-variance efficient set. Copyright © 2006 Wing-Keung Wong. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. 1. Introduction Mean-variance (MV) efficient sets have been widely used in both economics and finance to analyze how people make their choices among risky assets. Markowitz [21] demon- strated that if the ordering of alternatives is to satisfy the von Neumann-Morgenstern [39] (NM) axioms of rational behavior, only a quadratic (NM) utility function is con- sistent with an ordinal expected utility function that depends solely on the mean and variance of the return. Thereafter, Feldstein [7], Hanoch and Levy [12], Rothschild and Stiglitz [31, 32], and others commented that t