Marginal Conditional Stochastic Dominance, Statistical Inference and Measuring Portfolio Performance

Posted: 31 Jul 2000

Abstract

A simple statistical test is developed for marginal conditional stochastic dominance (MCSD). The MCSD is an extension of second degree stochastic dominance. As such, without specification of the return-generating process, it can rank securities according to marginal changes of return distributions conditionally to the distribution of the market proxy, thereby, proving a powerful technique for measuring portfolio performance. Although the MCSD test is asymptotic and conservative, under both the hypotheses of homoscedasticity and heteroscedasticity, it has power to detect the dominance alternative for samples with more than 300 observations. For an illustration, the MCSD test is applied to international equity markets. The test is able to show that nine of twenty-eight equity markets are dominated by the world market.

JEL Classification: G11, C49

Suggested Citation

Chow, K. Victor, Marginal Conditional Stochastic Dominance, Statistical Inference and Measuring Portfolio Performance. Available at SSRN: https://ssrn.com/abstract=224709

K. Victor Chow (Contact Author)

West Virginia University ( email )

College of Business and Economics P.O. Box 6025
Morgantown, WV 26506-6025
United States

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