Features

• Uses real data and statistical procedures, such as hypothesis testing, to show how SD theory is applied in financial situations
• Introduces utility theory for decision making under risk
• Discusses various research issues, such as how to use empirical data to arrive at decisions and how to conduct statistical tests when the data is coarse
• Includes the authors’ own simple proofs of SD results
• Explores numerous applications, including financial diversification, evaluating hedge funds, and income inequality
• Presents the material from the ground up with end-of-chapter exercises and selected solutions

Summary

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.