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ACADEMY OF ECONOMIC STUDIES DOCTORAL SCHOOL OF FINANCE-BANKING ORDERED MEAN DIFFERENCE AND STOCHASTIC DOMINANCE AS PORTFOLIO PERFORMANCE MEASURES with an approach to cointegration. Superviser: Professor Moisă Altăr MSc Student: George Popescu. Scheme. • THE EQUIVALENT MARGIN
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ACADEMY OF ECONOMIC STUDIESDOCTORAL SCHOOL OF FINANCE-BANKINGORDERED MEAN DIFFERENCE AND STOCHASTIC DOMINANCE AS PORTFOLIO PERFORMANCE MEASURESwith an approach to cointegration
Superviser: Professor Moisă Altăr
MSc Student: George Popescu
• THE EQUIVALENT MARGIN
• THE OMD. UTILITY FUNCTION AND POVERTY GAP FUNCTION.
• STOCHASTIC DOMINANCE
• THE ECONOMETRIC MODEL
• EMPIRICAL APPLICATION
R: benchmark return
t: penalty levied on the fund return
x: investment in fund
The Poverty gap function:
The average poverty gap in B (the dominated distribution) is greater than in A (the dominant distribution) for all poverty lines less than or equal to z. There is a longer way from the actual level of income B to the poverty threshold than from the actual level of A to the same poverty threshold.
The poverty gap function:
So: this kind of utility function shows how far we are from the poverty threshold, after we surpassed the threshold
Introducing the utility function in the equivalent margin formula gives:
OMD = the average area between the regression curve of the fund return on the benchmark return and the benchmark return itself, taken on the Ox axis
If t(P)>0 for all P, then the fund was superior to the benchmark
(for all P)
- each investor can be seen as a spectrum of elementary investors (“gnomes” as named by Bowden), each having a put option profile utility function, but differing by the “strike price” (P), which represents the degree of aversion to risk (P moves to the right as the aversion to risk decreases)
tU: independent of the degree of aversion to risk
or, in terms of the poverty gap function:
OMD for R with r as benchmark:
The estimated values for OMD [t(P)]
Only the significant regressors maintained in terms of t-Statistic (p-values <0.05):
- series sorted in ascending order after the IFM values
The regression to be estimated: