Stochastic dominance analysis of CTA funds

Stochastic dominance analysis of CTA funds In this paper, we employ the stochastic dominance (SD) approach to rank the performance of commodity trading advisors (CTA) funds. An advantage of this approach is that it alleviates the problems that can arise if CTA returns are not normally distributed by utilizing the entire returns distribution. We find both first-order and higher-order SD relationships amongst the CTA funds and conclude that investors are better off investing in the first-order dominant funds to maximize their expected utilities and expected wealth. However, for higher-order dominant CTAs, risk-averse investors can maximize their expected utilities but not their expected wealth. In addition to the advantages of the SD approach in the case of non-normal returns, the paper concludes that the approach is more appropriate compared with traditional approaches as a filter in the CTA selection process as it provides meaningful economic interpretation of the results. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Stochastic dominance analysis of CTA funds

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Publisher
Springer US
Copyright
Copyright © 2012 by Springer Science+Business Media, LLC
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-012-0284-1
Publisher site
See Article on Publisher Site

Abstract

In this paper, we employ the stochastic dominance (SD) approach to rank the performance of commodity trading advisors (CTA) funds. An advantage of this approach is that it alleviates the problems that can arise if CTA returns are not normally distributed by utilizing the entire returns distribution. We find both first-order and higher-order SD relationships amongst the CTA funds and conclude that investors are better off investing in the first-order dominant funds to maximize their expected utilities and expected wealth. However, for higher-order dominant CTAs, risk-averse investors can maximize their expected utilities but not their expected wealth. In addition to the advantages of the SD approach in the case of non-normal returns, the paper concludes that the approach is more appropriate compared with traditional approaches as a filter in the CTA selection process as it provides meaningful economic interpretation of the results.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Apr 3, 2012

References

  • Non-normality and risk in developing Asian markets
    Alles, L; Murray, L
  • Toward an empirical analysis of polarization
    Anderson, G
  • Test statistics for prospect and Markowitz stochastic dominances with applications
    Bai, ZD; Li, H; Liu, HX; Wong, WK
  • Does post-earnings-announcement drift in stock prices reflect a market inefficiency? A stochastic dominance approach
    Bernard, VL; Seyhun, HN
  • The relationship between arbitrage and first order stochastic dominance
    Jarrow, R
  • Risk the pricing of capital assets and the evaluation of investment portfolios
    Jensen, MC
  • A performance comparison between cross-sectional stochastic dominance and traditional event study methodologies
    Larsen, GA; Resnick, BG

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