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Consistent Testing for Stochastic Dominance under General Sampling Schemes

Oliver Linton (), Esfandiar Maasoumi () and Yoon-Jae Whang ()

No 2003,31, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

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 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 subsampling; we show that the resulting tests are consistent and powerful against some N|1/2 local alternatives even when computed with a data-based subsample size. We also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably. We show that our test is asymptotically similar on the entire boundary of the null hypothesis, and is unbiased. In comparison, any method based on resampling or simulating from the least favorable distribution does not have these properties and consequently will have less power against some alternatives.

Date: 2003
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Journal Article: Consistent Testing for Stochastic Dominance under General Sampling Schemes (2005) Downloads
Working Paper: Consistent testing for stochastic dominance under general sampling schemes (2003) Downloads
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