Testing for Third-Order Stochastic Dominance with Diversification Possibilities
18 Pages Posted: 26 Feb 2008
Date Written: May 2002 2,
We derive an empirical test for third-order stochastic dominance that allows fordiversification between choice alternatives. The test can be computed usingstraightforward linear programming. Bootstrapping techniques and asymptoticdistribution theory can approximate the sampling properties of the test results and allowfor statistical inference. Our approach is illustrated using real-life US stock market data.
Keywords: portfolio selection, portfolio evaluation, stochastic dominance, efficiency, linear programming
JEL Classification: M, G3, C19
Suggested Citation: Suggested Citation