Journal of Risk Model Validation

Empirically testing for the location–scale condition: a review of the economic literature

Michael Vassalos, Carl R. Dillon and Paul D. Childs


An interesting strand of the applied economic literature considers the conditions that are required for two major theories of economic decisions under uncertainty, mean-variance and expected utility to be consistent with each other. One of these conditions is the location-scale (LS) parameter condition. If the LS condition can be verified, there is a clear sense in which a mean-variance approach, which assumes a portfolio variance as the risk measure, will be validated.