Zhenzhen Zhu

New Tests for Poorness, Richness, and Middle Class Welfare: Stochastic Dominance Analysis for Different Types of Social Welfare Functions

Chow, et al. (2016) use the theory of ascending stochastic dominance (ASD), descending stochastic dominance (DSD) to develop stochastic dominance (SD) tests for richness and poorness. In this paper, we extend their work by applying Markowitz stochastic dominance (MSD) and prospect stochastic dominance (PSD) to develop SD tests for the poor (test for poorness), the rich (test for richness), and for the middle class (we call it test for middle class) to achieve a more robust analysis of relative welfare levels in the study of income distributions. The findings of these tests can be used to draw preference for different types of increasing social welfare functions; namely, concave social welfare functions, convex social welfare functions, and S-shaped and reverse S-shaped social welfare functions. The feasibility of the proposed approach and the new tests of richness, poorness, AND the middle class developed for it are demonstrated using distributions of incomes in Hong Kong.

Market liberalizations and efficiency in Latin America

Purpose This paper aims to examine the impact of stock market liberalization on efficiency of the stock markets in Latin America. Design/methodology/approach Daily stock indices from Latin American countries, including Brazil, Mexico, Chile, Peru, Jamaica and Trinidad and Tobago, are used in the analysis. To examine the impact of stock market liberalization on efficiency, the authors use several approaches, including the runs test, Chow–Denning multiple variation ratio test, Wright variance ratio test, the martingale hypothesis test and the stochastic dominance (SD) test, on the above Latin American stock market indices. Findings The authors find that stock market liberalization does not improve stock market efficiency in Latin America. Originality/value This investigation is among the first to examine the impact of stock market liberalization on the efficiency of the stock markets. It is among the first to examine the impact of stock market liberalization on the efficiency of the Latin American stock markets. It is also among the first to apply the martingale hypothesis test and a SD approach on issue about efficient market.

Mean-Variance and Stochastic Dominance Analysis of Global Exchange-Traded Funds

We employ the stochastic dominance (SD) approach that utilizes the entire return distribution to rank the performance of exchange-traded funds as traditional mean-variance and CAPM approaches may be inappropriate given the nature of non-normal returns. We find second and third-order stochastic dominance relationships amongst the assets and conclude that by investing in higher-order dominant funds, risk-averse investors can maximize their expected utilities but not their wealth. In addition, we find the common characteristic for most pairs of funds is that one fund is preferred to another in the negative domain whereas the preference reverses in the positive domain. We conclude that the stochastic dominance approach is more appropriate compared with traditional approaches as a filter in exchange-traded fund selection. Compared with traditional approaches, the SD approach, not only is assumption free, but also provides greater insights to the performance and risk inherent in an exchange-traded fund’s track record.