Consistent Testing for Stochastic Dominance under General Sampling Schemes

Oliver Bruce Linton (), Esfandiar Maasoumi and Yoon-Jae Whang ()
Authors registered in the RePEc Author Service: Esfandiar Maasoumi and Esfandiar Maasoumi ()

Review of Economic Studies, 2005, vol. 72, issue 3, pages 735-765

Abstract: We propose a procedure for estimating the critical values of the extended Kolmogorov-Smirnov tests of Stochastic Dominance of arbitrary order in the general K-prospect case. We allow for the observations to be serially dependent and, for the first 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 N-super-1/2 local alternatives. We also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably. We describe an alternative method for obtaining critical values based on recentring the test statistic and using full-sample bootstrap methods. We compare the two methods in theory and in practice. Copyright The Review of Economic Studies Limited, 2005.

Date: 2005
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