On the Dual Test for SSD Efficiency: With an Application to Momentum Investment Strategies
European Journal of Operational Research , Volume 185 - Issue 3 p. 1564- 1573
This paper analyzes the dual formulation of Post’s [Post, T., 2003. Empirical tests for stochastic dominance efficiency. Journal of Finance 58, 1905–1932] test for second-order stochastic dominance (SSD) efficiency of a given investment portfolio relative to all possible portfolios formed from set of assets. In contrast to the earlier work, we (1) provide a direct proof for the dual that does not rely on expected utility theory, (2) adhere to the original definition of SSD, (3) phrase in terms of a general polyhedral portfolio possibilities set and (4) construct a SSD dominating benchmark portfolio from the optimal solution. To illustrate the dual SSD test, we apply the test to analyze the effect of short-selling restrictions on the profitability of momentum investment strategies.
|investment analysis, linear programming, stochastic dominance|
|ERIM Top-Core Articles|
|European Journal of Operational Research|
|Organisation||Erasmus Research Institute of Management|
Post, G.T. (2008). On the Dual Test for SSD Efficiency: With an Application to Momentum Investment Strategies. European Journal of Operational Research, 185(3), 1564–1573. doi:10.1016/j.ejor.2006.08.010