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A new stochastic dominance criterion for dependent random variables with applications

Author

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  • Belzunce, Félix
  • Martínez-Riquelme, Carolina

Abstract

In this paper we develop a new tool for the comparison of paired data based on a new criterion of stochastic dominance that takes into account the dependence structure of the random variables under comparison. This new procedure provides a more detailed comparison of dependent random variables and overcomes some difficulties of standard techniques like Student's t and Wilcoxon-Mann-Whitney tests for non normal data. This tool provides an alternative to the usual stochastic dominance criterion which only considers the marginal distributions in the comparison. We show how this new tool can be fruitfully used for the comparison of paired asset returns.

Suggested Citation

  • Belzunce, Félix & Martínez-Riquelme, Carolina, 2023. "A new stochastic dominance criterion for dependent random variables with applications," Insurance: Mathematics and Economics, Elsevier, vol. 108(C), pages 165-176.
    • Handle: RePEc:eee:insuma:v:108:y:2023:i:c:p:165-176
    DOI: 10.1016/j.insmatheco.2022.12.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Stochastic dominance; Dependent random variables; Nonparametric tests; Portfolio selection; Regret theory;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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