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Consistent Testing for Stochastic Dominance Under General Sampling Schemes

54 Pages Posted: 21 Jul 2008  

Oliver B. Linton

University of Cambridge

Esfandiar Maasoumi

Emory University

Yoon-Jae Whang

Seoul National University - School of Economics

Date Written: December 2003

Abstract

We propose a procedure for estimating the critical values of the extended Kolmogorov-Smirnov tests of Stochastic Dominance of arbitrary order 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 based on subsampling and we show that the resulting tests are consistent and powerful against some N -½ local alternatives. We also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably. We describe an alternative method for obtaining critical values based on recentring the test statistic and using full sample bootstrap methods. We compare the two methods in theory and in practice.

JEL Classification: C16, C53, G12

Suggested Citation

Linton, Oliver B. and Maasoumi, Esfandiar and Whang, Yoon-Jae, Consistent Testing for Stochastic Dominance Under General Sampling Schemes (December 2003). LSE STICERD Research Paper No. EM466. Available at SSRN: https://ssrn.com/abstract=1162626

Oliver Linton (Contact Author)

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

Esfandiar Maasoumi

Emory University ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

HOME PAGE: http://economics.emory.edu/home/people/faculty/Maasoumiesfandiar_Home.html

Yoon-Jae Whang

Seoul National University - School of Economics ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742
Korea
+82 2 80 6362 (Phone)
+82 2 86 4231 (Fax)

HOME PAGE: http://plaza.snu.ac.kr/~whang

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