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Consistent testing for stochastic dominance: a subsampling approach

Authors: Oliver Linton , Esfandiar Maasoumi and Yoon-Jae Wang
Date: 31 December 2002
Type: cemmap Working Paper, CWP03/02
DOI: 10.1920/wp.cem.2002.0302

Abstract

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 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 N1=2 local alternatives. We also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably.

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Now published:
Oliver Linton, Esfandiar Maasoumi and Yoon-Jae Wang July 2005, Consistent testing for stochastic dominance: a subsampling approach, Journal Article

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