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Stochastic dominance analysis of CTA funds

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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.

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Acknowledgments

The authors are most grateful to Professor C.F. Lee and the referee for their substantive comments and suggestions that significantly improved this manuscript. The third author would like to thank Professors Robert B. Miller and Howard E. Thompson for their continuous guidance and encouragement. The research is partially supported by Universiti Sains Malaysia, Singapore Management University, Hong Kong Baptist University, and the Research Grants Council (RGC) of Hong Kong. The first author would like to acknowledge Universiti Sains Malaysia (RU Grant No. 1001/PSOSIAL/816094).

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Authors and Affiliations

  1. Economics Program, School of Social Sciences, Universiti Sains Malaysia, 11800 USM, Penang, Malaysia

    Hooi Hooi Lean

  2. Lee Kong Chian School of Business, Singapore Management University, 50 Stamford Road, Singapore, 178899, Singapore

    Kok Fai Phoon

  3. Department of Economics, Hong Kong Baptist University, Kowloon Tong, Hong Kong, China

    Wing-Keung Wong

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  1. Hooi Hooi Lean
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  2. Kok Fai Phoon
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  3. Wing-Keung Wong
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Correspondence to Kok Fai Phoon.

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Lean, H.H., Phoon, K.F. & Wong, WK. Stochastic dominance analysis of CTA funds. Rev Quant Finan Acc 40, 155–170 (2013). https://doi.org/10.1007/s11156-012-0284-1

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