Testing for Third-Order 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 an empirical test for third-order stochastic dominance that allows for diversification between choice alternatives. The test 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 approach is illustrated using real-life US stock market data.

Keywords: efficiency; linear programming; portfolio evaluation; portfolio selection; stochastic dominance (search for similar items in EconPapers)
JEL-codes: C19 G3 M (search for similar items in EconPapers)
Date: 2002-02-05
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