Stochastic Dominance and Applications to Finance, Risk and Economics: 1st Edition (Paperback) book cover

Stochastic Dominance and Applications to Finance, Risk and Economics

1st Edition

By Songsak Sriboonchita, Wing-Keung Wong, Sompong Dhompongsa, Hung T. Nguyen

Chapman and Hall/CRC

455 pages

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Paperback: 9781138117990
pub: 2017-06-28
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Hardback: 9781420082661
pub: 2009-10-19
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Description

Drawing from many sources in the literature, Stochastic Dominance and Applications to Finance, Risk and Economics illustrates how stochastic dominance (SD) can be used as a method for risk assessment in decision making. It provides basic background on SD for various areas of applications.

Useful Concepts and Techniques for Economics Applications

The majority of the text presents a systematic exposition of SD, emphasizing rigor and generality. It covers utility theory, multivariate SD, quantile functions, risk modeling, Choquet integrals, other risk measures, statistical inference, nonparametric estimation, hypothesis testing, and econometrics. The remainder of the book explores new applications of SD in finance, risk, and economics. At the beginning of each economic concept, the authors clearly explain only the necessary mathematics so readers are not overburdened with learning nonessential, arduous mathematics.

This accessible guide helps readers build a useful repertoire of mathematical tools in decision making under uncertainty, especially in investment science. It provides thorough coverage on the theory of SD, along with many applications to economics and other fields where risk is crucial.

Reviews

The book helps readers in building a useful repertoire of mathematical tools in decision making under uncertainty, especially in investment science, and provides thorough coverage on the theory of SD, along with many applications to economics and other fields where risk is crucial. Given these, it may be used as a textbook for a course on stochastic dominance for beginners as well as a solid reference book for researchers, especially in the field of economics.

Zentralblatt MATH 1180

Table of Contents

Utility in Decision Theory

Choice under certainty

Basic probability background

Choice under uncertainty

Utilities and risk attitudes

Foundations of Stochastic Dominance

Some preliminary mathematics

Deriving representations of preferences

Stochastic dominance (SD)

Issues in Stochastic Dominance

A closer look at the mean-variance rule

Multivariate SD

Stochastic dominance via quantile functions

Financial Risk Measures

The problem of risk modeling

Some popular risk measures

Desirable properties of risk measures

Choquet Integrals as Risk Measures

Extended theory of measures

Capacities

The Choquet integral

Basic properties of the Choquet integral

Comonotonicity

Notes on copulas

A characterization theorem

A class of coherent risk measures

Consistency with SD

Foundational Statistics for Stochastic Dominance

From theory to applications

Structure of statistical inference

Generalities on statistical estimation

Nonparametric estimation

Basics of hypothesis testing

Models and Data in Econometrics

Justifications of models

Coarse data

Modeling dependence structure

Some additional statistical tools

Applications to Finance

Diversification

Diversification on convex combinations

Prospect and Markowitz SD

Market rationality and efficiency

SD and rationality of momentum effect

Applications to Risk Management

Measures of profit/loss for risk analysis

REITs and stocks and fixed-income assets

Evaluating hedge funds performance

Evaluating iShare performance

Applications to Economics

Indifference curves/location-scale (LS) family

LS family for n random seed sources

Elasticity of risk aversion and trade

Income inequality

Appendix: Stochastic Dominance Tests

Bibliography

Index

Exercises appear at the end of each chapter.

About the Authors

Songsak Sriboonchitta is an associate professor and dean of the Faculty of Economics at Chiang Mai University in Thailand.

Wing-Keung Wong is a professor of economics at Hong Kong Baptist University in China.

Sompong Dhompongsa is a professor of mathematics at Chiang Mai University in Thailand.

Hung T. Nguyen is a professor of mathematical sciences at New Mexico State University in Las Cruces.

Subject Categories

BISAC Subject Codes/Headings:
BUS027000
BUSINESS & ECONOMICS / Finance
MAT000000
MATHEMATICS / General
MAT029000
MATHEMATICS / Probability & Statistics / General