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Conditional stochastic dominance tests in dynamic settings

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  • Jose Olmo
  • Jesus Gonzalo

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Abstract

This paper proposes nonparametric consistent tests of conditional stochastic dominance of arbitrary order in a dynamic setting. The novelty of these tests lies in the nonparametric manner of incorporating the information set into the test. The test allows for general forms of unknown serial and mutual dependence between random variables, and has an asymptotic distribution that can be easily approximated by simulation. This method has good finite-sample performance. These tests are applied to determine the investment efficiency between U S industry portfolios conditional on the dynamics of the market portfolio. The empirical analysis suggests that Telecommunications dominates the other sectoral portfolios under risk aversion.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1205.

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Date of creation: Feb 2012
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Handle: RePEc:cte:werepe:we1205

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Related research

Keywords: Hypothesis testing; Kernel estimation; Lower partial moments; Nonparametric regression; P-value transformation; Stochastic dominance;

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  1. Scaillet, Olivier & Topaloglou, Nikolas, 2010. "Testing for Stochastic Dominance Efficiency," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(1), pages 169-180.
  2. Miguel A. Delgado & Juan Carlos Escanciano, 2013. "Conditional Stochastic Dominance Testing," Journal of Business & Economic Statistics, American Statistical Association, vol. 31(1), pages 16-28, January.
  3. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, volume 1, number 8355.
  4. Delgado, Miguel A. & Escanciano, Juan Carlos, 2007. "Nonparametric Tests for Conditional Symmetry in Dynamic Models," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/2494, Universidad Carlos III de Madrid.
  5. Garry F. Barrett & Stephen G. Donald, 2003. "Consistent Tests for Stochastic Dominance," Econometrica, Econometric Society, vol. 71(1), pages 71-104, January.
  6. Kaur, Amarjot & Prakasa Rao, B.L.S. & Singh, Harshinder, 1994. "Testing for Second-Order Stochastic Dominance of Two Distributions," Econometric Theory, Cambridge University Press, vol. 10(05), pages 849-866, December.
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