Testing for Stochastic Dominance with Diversification Possibilities

Thierry Post

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: We derive empirical tests for stochastic dominance that allow for diversification between choice alternatives. The tests can be computed using straightforward linear programming. Bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference. Our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation (as well as other choice problems under uncertainty that involve diversification possibilities). An empirical application for US stock market data illustrates our approach.

Keywords: linear programming; portfolio diversification; portfolio evaluation; portfolio selection; stochastic dominance (search for similar items in EconPapers)
JEL-codes: C44 G3 M (search for similar items in EconPapers)
Date: 2001-11-01
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Citations: View citations in EconPapers (2)

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