Testing for Stochastic Dominance with Diversification Possibilities
36 Pages Posted: 19 Nov 2005
Date Written: November 2001
We derive empirical tests for stochastic dominance that allow for diversification between choice alternatives. The tests can be computed using straightforward linear programming. Bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference. Our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation (as well as other choice problems under uncertainty that involve diversification possibilities). An empirical application for US stock market data illustrates our approach.
Keywords: Stochastic dominance, portfolio diversification, linear programming, portfolio selection, portfolio evaluation
JEL Classification: C63, D81, G11, M, G3, C44
Suggested Citation: Suggested Citation