Testing for Stochastic Dominance with Diversification Possibilities

36 Pages Posted: 19 Nov 2005

See all articles by Thierry Post

Thierry Post

Graduate School of Business of Nazarbayev University

Date Written: November 2001

Abstract

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

Post, Thierry, Testing for Stochastic Dominance with Diversification Possibilities (November 2001). ERIM Report Series Reference No. ERS-2001-38-F&A; EFA 2002 Berlin Meetings Discussion Paper. Available at SSRN: https://ssrn.com/abstract=296485

Thierry Post (Contact Author)

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

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