Panel Stochastic Dominance Test and Panel Informational Efficiency LR Test

18 Pages Posted: 12 May 2015

See all articles by Christian de Peretti

Christian de Peretti

University Claude Bernard Lyon 1; Ecole Centrale de LYon

Chia-Ying Chan

Yuan-Ze University - Department of Finance

Wing-Keung Wong

Asia University, Department of Finance

Carole Siani

University of Lyon 1

Date Written: May 10, 2015

Abstract

This paper propose a new panel stochastic dominance (SD) test-PDD test, the asymptotic properties are derived, which extends Davidson and Duclos (DD) SD test to a panel context. The PDD test also contributes to settle one of the demerits while working with financial derivatives time series: that the standard individual tests for Stochastic Dominance in time series are unsatisfactory in terms of power when the sample size is too small, and typically the financial derivatives have a limited life, in particular, stock options and covered warrants. This is because the pairwise SD tests are nonparametric, and nonparametric tests require large sample size, in this case, the individual tests for financial derivative time series may not distinguish between the null and the alternative hypotheses for each series, and lead to retain the null hypothesis, even if the alternative is true. Hence the PDD test would improve the power of individual SD tests: a panel test gathers all the information of all the series, and then increases the power compared to its corresponding individual test. This paper also extends the classical likelihood ratio (LR) information efficiency test to a panel framework to get more powerful new tests. A bootstrap methodology is developed to correct the size distortion of the LR test.

Keywords: Covered warrants, market efficiency, panel stochastic dominance, panel information efficiency likelihood ratio test, bootstrap.

JEL Classification: C14, G11, G14, G15.

Suggested Citation

de Peretti, Christian and Chan, Chia-Ying and Wong, Wing-Keung and Siani, Carole, Panel Stochastic Dominance Test and Panel Informational Efficiency LR Test (May 10, 2015). Available at SSRN: https://ssrn.com/abstract=2604662 or http://dx.doi.org/10.2139/ssrn.2604662

Christian De Peretti

University Claude Bernard Lyon 1 ( email )

Institut de Science Financière et d'Assurances
50, Avenue Tony Garnier
Lyon Cedex 07, 69366
France
+33 (0)4 37 28 74 39 (Phone)
+33 (0)4 37 28 76 32 (Fax)

HOME PAGE: http://https://isfa.univ-lyon1.fr/recherche/membres-du-laboratoire

Ecole Centrale de LYon

36 avenue Guy de Collongue
Ecully, Rhones 69134
France
+33 (0)4 72 18 63 34 (Phone)
+33 (0)4 72 18 67 63 (Fax)

HOME PAGE: http://www.ec-lyon.fr

Chia-Ying Chan

Yuan-Ze University - Department of Finance ( email )

320 Chungli
Taiwan

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

Carole Siani

University of Lyon 1 ( email )

43 Bl du 11 novembre 1918
Lyon, Villeurbanne cedex 69622
France

HOME PAGE: http://recherche.univ-lyon2.fr/eric/82-Carole-Siani.html

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