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Testing for infinite order stochastic dominance with applications to finance, risk and income inequality

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  • John Knight

    ()

  • Stephen Satchell

    ()

Abstract

The authors develop a test of infinite degree stochastic dominance based on the use of the empirical moment generating function. Two applications are considered. One uses the income data of Anderson (Econometrica, 1996) and derives results consistent with his. In the other application, the dominance between the US and UK stockmarkets is examined. Using data on the S&P 500 and the FTALL-Share, it is shown that the US displays infinite degree stochastic dominance over the UK.

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File URL: http://hdl.handle.net/10.1007/s12197-007-9003-5
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Bibliographic Info

Article provided by Springer in its journal Journal of Economics and Finance.

Volume (Year): 32 (2008)
Issue (Month): 1 (January)
Pages: 35-46

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Handle: RePEc:spr:jecfin:v:32:y:2008:i:1:p:35-46

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Related research

Keywords: Laplace transform; Infinite order degree stochastic dominance; Income inequality; C10; D31; G10;

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  1. DAVIDSON, Russell & DUCLOS, Jean-Yves, 1995. "Statistical Inference for the Measurement of the Incidences of Taxes and Transfers," Cahiers de recherche 9521, Université Laval - Département d'économique.
  2. Knight, John L. & Yu, Jun, 2002. "Empirical Characteristic Function In Time Series Estimation," Econometric Theory, Cambridge University Press, vol. 18(03), pages 691-721, June.
  3. Shorrocks, Anthony F & Foster, James E, 1987. "Transfer Sensitive Inequality Measures," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 485-97, July.
  4. Anderson, Gordon, 1996. "Nonparametric Tests of Stochastic Dominance in Income Distributions," Econometrica, Econometric Society, vol. 64(5), pages 1183-93, September.
  5. Jiang, George J & Knight, John L, 2002. "Estimation of Continuous-Time Processes via the Empirical Characteristic Function," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 198-212, April.
  6. Scott, Robert C & Horvath, Philip A, 1980. " On the Direction of Preference for Moments of Higher Order Than the Variance," Journal of Finance, American Finance Association, vol. 35(4), pages 915-19, September.
  7. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
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