Application of stochastic dominance on share return with normal distribution

Abstract

The movement of return is an important indicator for investors for determining the decision whether to sell, hold, or buy shares. If the utility function U, i.e. the measurement of the relative value of a company’s business income follows a particular distribution, then this information can improve the level of decision-making accuracy. The purpose of this research is to apply stochastic dominance (SD) on stock return data, which is assumed to follow normal distribution. In this research, the data used is daily stock price data derived from IDX Statistics 2016. On conducting the research, normality test of data was performed. Furthermore, criteria of SD has been applied to stock price return data. From the result of the research, it can be concluded that SD criteria with normal distributed data can increase SD criteria.The movement of return is an important indicator for investors for determining the decision whether to sell, hold, or buy shares. If the utility function U, i.e. the measurement of the relative value of a company’s business income follows a particular distribution, then this information can improve the level of decision-making accuracy. The purpose of this research is to apply stochastic dominance (SD) on stock return data, which is assumed to follow normal distribution. In this research, the data used is daily stock price data derived from IDX Statistics 2016. On conducting the research, normality test of data was performed. Furthermore, criteria of SD has been applied to stock price return data. From the result of the research, it can be concluded that SD criteria with normal distributed data can increase SD criteria.