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Stochastic dominance tests

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  • Topaloglou, Nikolas
  • Tsionas, Mike G.

Abstract

We develop stochastic dominance tests of a given prospect compared with multiple choice alternatives. We account for all types of preferences. The tests are formulated in terms of linear as well as MIP models, and developed based on bayesian analysis, which relies on novel Markov Chain Monte Carlo procedures. Empirical results indicate that the market portfolio is Prospect stochastic dominance optimal. This implies that there are S-shaped utility functions that rationalize the market portfolio.

Suggested Citation

  • Topaloglou, Nikolas & Tsionas, Mike G., 2020. "Stochastic dominance tests," Journal of Economic Dynamics and Control, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:dyncon:v:112:y:2020:i:c:s0165188920300191
    DOI: 10.1016/j.jedc.2020.103849
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