An Improved Bootstrap Test of Stochastic Dominance

44 Pages Posted: 20 Jul 2009

See all articles by Oliver B. Linton

Oliver B. Linton

University of Cambridge

Kyungchul Song

University of British Columbia (UBC) - Department of Economics

Yoon-Jae Whang

Seoul National University - School of Economics

Date Written: July 17, 2009

Abstract

We propose a new method of testing stochastic dominance that improves on existing tests based on the standard bootstrap or subsampling. The method admits prospects involving infinite as well as finite dimensional unknown parameters, so that the variables are allowed to be residuals from nonparametric and semiparametric models. The proposed bootstrap tests have asymptotic sizes that are less than or equal to the nominal level uniformly over probabilities in the null hypothesis under regularity conditions. This paper also characterizes the set of probabilities that the asymptotic size is exactly equal to the nominal level uniformly. As our simulation results show, these characteristics of our tests lead to an improved power property in general. The improvement stems from the design of the bootstrap test whose limiting behavior mimics the discontinuity of the original test's limiting distribution.

Keywords: set estimation, size of test, similarity, bootstrap, subsampling

JEL Classification: C12, C14, C52

Suggested Citation

Linton, Oliver B. and Song, Kyungchul and Whang, Yoon-Jae, An Improved Bootstrap Test of Stochastic Dominance (July 17, 2009). Cowles Foundation Discussion Paper No. 1713, Available at SSRN: https://ssrn.com/abstract=1435460 or http://dx.doi.org/10.2139/ssrn.1435460

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

Kyungchul Song

University of British Columbia (UBC) - Department of Economics

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada

Yoon-Jae Whang (Contact Author)

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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