Journal Article

Consistent testing for stochastic dominance: a subsampling approach

Authors

Oliver Linton, Esfandiar Maasoumi, Yoon-Jae Wang

Published Date

1 July 2005

Type

Journal Article

We propose a procedure for estimating the critical values of the extended Kolmogorov- Smirnov tests of First and Second Order Stochastic Dominance in the general K-prospect case. We allow for the observations to be serially dependent and, for the ナrst time, we can accommodate general dependence amongst the prospects which are to be ranked. Also, the prospects may be the residuals from certain conditional models, opening the way for conditional ranking. We also propose a test of Prospect Stochastic Dominance. Our method is based on subsampling and we show that the resulting tests are consistent and powerful against some Nᄀ1=2 local alternatives. We also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably.


Previous version

Consistent testing for stochastic dominance: a subsampling approach
Oliver Linton, Esfandiar Maasoumi, Yoon-Jae Wang
CWP03/02