Journal Article

Consistent Testing for Stochastic Dominance under General Sampling Schemes

Oliver Linton, Esfandiar Maasoumi and Yoon-Jae Whang

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 72, issue 3, pages 735-765
Published in print July 2005 | ISSN: 0034-6527
Published online July 2005 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2005.00350.x
Consistent Testing for Stochastic Dominance under General Sampling Schemes

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We propose a procedure for estimating the critical values of the extended Kolmogorov-Smirnov tests of Stochastic Dominance of arbitrary order in the general K-prospect case. We allow for the observations to be serially dependent and, for the first time, we can accommodate general dependence amongst the prospects which are to be ranked. Also, the prospects may be the residuals from certain conditional models, opening the way for conditional ranking. We also propose a test of Prospect Stochastic Dominance. Our method is based on subsampling and we show that the resulting tests are consistent and powerful against some N−1/2 local alternatives. We also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably. We describe an alternative method for obtaining critical values based on recentring the test statistic and using full-sample bootstrap methods. We compare the two methods in theory and in practice.

Keywords: C12; G12

Journal Article.  14099 words.  Illustrated.

Subjects: Econometric and Statistical Methods and Methodology: General ; Economics

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