Politická ekonomie
Politická ekonomie
Prague Economic Papers
University of Economics, Prague

Prague Economic Papers Vol. 27 No. 2

SSD Efficiency at Multiple Data Frequencies: Application on the OECD Countries

DOI: https://doi.org/10.18267/j.pep.649

[full text (PDF)]

Umut Ugurlu, Oktay Tas, Celal Barkan Guran, Aysun Guran

The second order stochastic dominance (SSD) has become exceedingly popular in recent years, due to its ability to determine the dominance of one asset over another for all risk-averse investors without a strict requirement in asset distribution. In this study, 33 OECD country indexes and their enriched set of assets, which consists of some combinations of these indexes, are investigated and compared between 2007 and 2015 by utilizing pairwise SSD comparisons, with different data frequencies, such as daily, weekly, monthly and quarterly. This paper contributes to the literature in three points: Firstly, a serious portion of the best performing OECD countries has the lowest GDP (PPP) per capita level. Secondly, the SSD efficient set depends on data frequency. Thirdly, when the data frequency is lowered, the difference between two SSD pairwise efficiency tests decreases.

Keywords: data frequency, OECD indexes, pairwise comparisons, second order stochastic dominance, SSD pairwise efficiency

JEL Classification: C61, G11, G14

References:

Abyankhar, A., Ho, K. Y., Zhao, H. (2005). Long-Run Post-Merger Stock Performance of UK

Acquiring Firms: A Stochastic Dominance Perspective. Applied Financial Economics, 15(10),

679–690, https://doi.org/10.1080/09603100500065305

Al-Khazali, O., Lean, H. H., Samet, A. (2014). Do Islamic Stock Indexes Outperform Conventional

Stock Indexes? A Stochastic Dominance Approach. Pacific-Basin Finance Journal, 28,

29–46, https://doi.org/10.1016/j.pacfin.2013.09.003

Best, R. J., Best, R. W., Yoder, J. A. (2000). Value Stocks and Market Efficiency. Journal

of Economics and Finance, 24(1), Spring 2000, 28–35, https://doi.org/10.1007/BF02759693

Branda, M., Kopa, M. (2012). DEA -Risk Efficiency and Stochastic Dominance Efficiency of Stock

Indexes. Czech Journal of Economics and Finance, 62(2), 106–124.

Branda, M., Kopa, M. (2014). On Relations between DEA -Risk Models and Stochastic Dominance

Efficiency Tests. Central European Journal of Operations Research, 22(1), 13–35,

https://doi.org/10.1007/s10100-012-0283-2

Branda, M., Kopa, M. (2016). DEA Models Equivalent to General N-th Order Stochastic

Dominance Efficiency Tests. Operations Research Letters, 44(2), 285–289,

https://doi.org/10.1016/j.orl.2016.02.007

De Giorgi, E., Post, T. (2008). Second-Order Stochastic Dominance, Reward-Risk Portfolio

Selection, and the CA PM. Journal of Financial and Quantitative Analysis, 43(2), June 2008,

525–546, https://doi.org/ http://dx.doi.org/10.1017/S0022109000003616

Dupacova, J., Kopa, M. (2012). Robustness in Stochastic Programs with Risk Constraints. Annals

of Operations Research, 200(1), 55–74, https://doi.org/10.1007/s10479-010-0824-9

Elton, E. J., Gruber, M. J. (1997). Modern Portfolio Theory, 1950 to Date. Journal of Banking &

Finance, 21(11–12), 1743–1759, https://doi.org/10.1016/S0378-4266(97)00048-4

Fabian, I. C., Mitra, G., Roman, D., Zverovich, V. (2011). An Enhanced Model for Portfolio Choice

with SS D Criteria: a Constructive Approach. Quantitative Finance, 11(10), October 2011,

1525–1534, https://doi.org/10.1080/1469768090349360

Fong, W. M. (2009). Speculative Trading and Stock Returns: A Stochastic Dominance Analysis

of the Chinese A-Share Market. Journal of International Financial Markets, Institutions &

Money, 19(4), 712–727, https://doi.org/10.1016/j.intfin.2008.12.003

Grechuk, B. (2014). A Simple SS D-Efficiency Test. Optimization Letters, 8(7), 2135–2143,

https://doi.org/10.1007/s11590-013-0720-8

Güran, C. B., Tas, O., Güran, A. (2013). Second Order Stochastic Dominance Efficiency Test

of a Portfolio – An Empirical Study on the BİST -30 Index. Paper presented at the IISRO

Conference Dubai.

Güran, C. B., Tas, O. (2015). Making Second Order Stochastic Dominance İnefficient Mean

Variance Portfolio Efficient: Application in Turkish BIST -30 Index. Iktisat Isletme ve Finans,

30(348), 69–94, https://doi.org/10.3848/iif.2015.348.4338

Hanoch, G., Levy, H. (1969). The Efficiency Analysis of Choices Involving Risk. Review

of Economic Studies, 36(3), 335–346, https://doi.org/10.2307/2296431

Hodder, J. E., Jackwerth, J. C., Kolokolova, O. (2015). Improved Portfolio Choice Using Second-

-Order Stochastic Dominance. Review of Finance, 19(4), 1623–1647,

https://doi.org/10.1093/rof/rfu025

Jensen, M. C. (1968). The Performance of Mutual Funds in the Period 1945-1964. Journal

of Finance, 23(2), 389–416, https://doi.org/10.1111/j.1540-6261.1968.tb00815.x

Kankova, V., Houda, M. (2015). Thin and Heavy Tails in Stochastic Programming. Kybernetika,

51(3), 433–456, https://doi.org/10.14736/kyb-2015-3-0433

Kankova V., Omelchenko, V. (2015). Empirical Estimates in Stochastic Programs with Probability

and Second Order Dominance Constraints. Acta Mathematica Universitatis Comenianae.

84(2), 267–281.

Kopa, M., Chovanec, P. (2008). A Second-Order Stochastic Dominance Portfolio Efficiency

Measure. Kybernetika, 44(2), 243–258.

Kopa, M., Post, T. (2009). A Portfolio Optimality Test Based on the First-Order Stochastic

Dominance Criterion. Journal of Financial and Quantitative Analysis, 44(5), 1103–1124,

https://doi.org/10.1017/S0022109009990251

Kopa, M., Post, T. (2015). A General Test for SS D Portfolio Efficiency. OR Spectrum, 37(3),

703–734, https://doi.org/10.1007/s00291-014-0373-8

Kopa, M., Tichy, T. (2012). Concordance Measures and Second Order Stochastic Dominance –

Portfolio Efficiency Analysis. E+M Economics&Management, 4, 110–120.

Kopa, M., Tichy, T. (2014). Comparison of Mean-Risk Efficient Portfolios in Asia-Pacific Capital

Markets. Emerging Markets Finance and Trade, 50(1), 226–240,

https://doi.org/10.2753/REE 1540-496X500113

Kraus, A., Litzenberger, R. (1976). Skewness Preference and the Valuation of Risky Assets.

Journal of Finance, 31(4), 1085–1099, https://doi.org/10.2307/2326275

Kuosmanen, T. (2004). Efficient Diversification According to Stochastic Dominance Criteria.

Management Science, 50(10), 1390–1406, http://doi.org/10.1287/mnsc.1040.0284

Levy, Haim. (2006). Stocastic Dominance: Investment Decision Making under Uncertainty. Second

Edition. New York: Springer Science. IS BN 978-1-4419-3983-8.

Linton, O., Post, T., Whang, Y. J. (2014). Testing for the Stochastic Dominance Efficiency

of a Given Portfolio. Econometrics Journal, 17(2), 59–74, http://doi.org/10.1111/ectj.12016

Lizyayev, A. (2012). Stochastic Dominance Efficiency Analysis of Diversified Portfolios:

Classification, Comparison and Refinements. Annals of Operations Research, 196(1),

391–410, http://doi.org/10.1007/s10479-012-1123-4

Markowitz, H. M. (1952). Portfolio Selection. Journal of Finance, 7(1), 77–91,

http://doi.org/10.2307/2975974

Post, T. (2003). Empirical Tests for Stochastic Dominance Efficiency. Journal of Finance, 58(5),

1905–1932, http://doi.org/10.1111/1540-6261.00592

Post, T. (2008). On the Dual Test for SS D Efficiency, with an Application to Momentum

Investment Strategies. European Journal of Operational Research, 185(3), 1564–1573,

http://doi.org/10.1016/j.ejor.2006.08.010

Post, T., Fang, Y., Kopa, M. (2015). Linear Tests for DARA Stochastic Dominance. Management

Science, 61(7), 1615–1629, http://doi.org/10.1287/mnsc.2014.1960

Post, T., Kopa, M. (2013). General Linear Formulations of Stochastic Dominance Criteria.

European Journal of Operational Research, 230(2), 321–332,

http://doi.org/10.1016/j.ejor.2013.04.015

Post, T., Van Vliet, P., Levy, H. (2008). Risk Aversion and Skewness Preference. Journal of Banking

& Finance, 32(7), 1178–1187, http://doi.org/10.1016/j.jbankfin.2006.02.008

Roman, D., Darby-Dowman, K., Mitra, G. (2006). Portfolio Construction Based on Stochastic

Dominance and Target Return Distributions. Mathematical Programming, Ser. B, 108(2–3),

541–569, http://doi.org/10.1007/s10107-006-0722-8

Sharpe, W. F. (1966). Mutual Fund Performance. Journal of Business, 39(1), 119–138,

http://doi.org/10.1086/294846

Sharpe, W. F. (1994). The Sharpe Ratio. The Journal of Portfolio Management, 21(1), 49–58,

https://doi.org/10.3905/jpm.1994.409501

Tas, O., Barjiough, F. M., Ugurlu, U. (2015). A Test of Second-Order Stochastic Dominance

with Different Weighting Methods: Evidence from BIST -30 and DJIA . Journal of Business

Economics and Finance, 4(4), 723–731,

http://doi.org/10.17261/Pressacademia.2015414538

Treynor, J. L. (1966). How to Rate Management Investment Funds. Harvard Business Review,

43(1), January-February, 63–75.