Semi-nonparametric test of second degree stochastic dominance with respect to a function

Keith D. Schumann

Journal of Econometrics, 2011, vol. 162, issue 1, 71-78

Abstract: In an expected utility framework, assuming a decision maker operates under utility k([dot operator][theta]), for two risky alternatives X and Y with respective distribution functions F and G, alternative X is said to dominate alternative Y with respect to k([dot operator][theta]) if for all y. Utilizing the empirical distribution functions of F and G, a statistical test is presented to test the null hypothesis of indifference between X and Y given k([dot operator][theta]) against the hypothesis that X dominates Y with respect to k([dot operator][theta]). This is a large sample testing application of stochastic dominance with respect to a function. The asymptotic distribution of the test statistic associated with the null hypothesis given a sub-set of the utility function parameter space is developed. Based on large sample rejection regions, the hypothesis of preference of one alternative over another is demonstrated with an empirical example.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:162:y:2011:i:1:p:71-78

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