Stochastic dominance and truncated sample data

Stochastic dominance and truncated sample data

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Article ID: iaor201522999
Volume: 13
Issue: 2
Start Page Number: 105
End Page Number: 116
Publication Date: Jun 1990
Journal: Journal of Financial Research
Authors:
Keywords: stochastic processes, investment, simulation
Abstract:

The purpose of this paper is to examine whether the chance of making erroneous investment decisions can be reduced by applying stochastic dominance rules to truncated, rather than complete, sample data of rates of return. A simulation approach is used that assumes the rates of return follow the symmetric stable probability distribution. Using a variety of relationships between probability distributions of rates of return, it is demonstrated that sample truncation has the potential of significantly reducing sampling errors in the selection between alternative investments.

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