Testing for Restricted Stochastic Dominance

37 Pages Posted: 30 Mar 2006  

Russell Davidson

McGill University; AMSE-GREQAM

Jean-Yves Duclos

Laval University; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006

Abstract

Asymptotic and bootstrap tests are studied for testing whether there is a relation of stochastic dominance between two distributions. These tests have a null hypothesis of nondominance, with the advantage that, if this null is rejected, then all that is left is dominance. This also leads us to define and focus on restricted stochastic dominance, the only empirically useful form of dominance relation that we can seek to infer in many settings. One testing procedure that we consider is based on an empirical likelihood ratio. The computations necessary for obtaining a test statistic also provide estimates of the distributions under study that satisfy the null hypothesis, on the frontier between dominance and nondominance. These estimates can be used to perform bootstrap tests that can turn out to provide much improved reliability of inference compared with the asymptotic tests so far proposed in the literature.

Keywords: stochastic dominance, empirical likelihood, bootstrap test

JEL Classification: C10, C12, C15, I32

Suggested Citation

Davidson, Russell and Duclos, Jean-Yves, Testing for Restricted Stochastic Dominance (March 2006). IZA Discussion Paper No. 2047. Available at SSRN: https://ssrn.com/abstract=894061 or http://dx.doi.org/10.2139/ssrn.894061

Russell Davidson

McGill University ( email )

855 Sherbrooke Street West
Department of Economics
Montreal, Quebec H3A 2T7 H3A 2T7
Canada
514-398-4400 x 09008 (Phone)

AMSE-GREQAM ( email )

GREQAM
Centre de la Vieille Charité
Marseille, 13002
France
+33 491140740 (Phone)

Jean-Yves Duclos (Contact Author)

Laval University ( email )

Quebec G1K 7P4
Canada
418-656-7096 (Phone)
418-656-9727 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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