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Testing For Restricted Stochastic Dominance

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Author Info
Russell Davidson ()
Jean-Yves Duclos ()

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Abstract

Asymptotic and bootstrap tests are studied for testing whether there is a relation of stochastic dominance between two distributions. These tests have a null hypothesis of nondominance, with the advantage that, if this null is rejected, then all that is left is dominance. This also leads us to define and focus on {\it restricted} stochastic dominance, the only empirically useful form of dominance relation that we can seek to infer in many settings. One testing procedure that we consider is based on an empirical likelihood ratio. The computations necessary for obtaining a test statistic also provide estimates of the distributions under study that satisfy the null hypothesis, on the frontier between dominance and nondominance. These estimates can be used to perform dominance tests that can turn out to provide much improved reliability of inference compared with the asymptotic tests so far proposed in the literature.

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Paper provided by McGill University, Department of Economics in its series Departmental Working Papers with number 2006-20.

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Length: 36 pages
Date of creation: Sep 2006
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Handle: RePEc:mcl:mclwop:2006-20

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Find related papers by JEL classification:
C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - General
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
I32 - Health, Education, and Welfare - - Welfare and Poverty - - - Measurement and Analysis of Poverty

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jens Carsten Jackwerth & George M. Constantinides & Michal Czerwonko & Stylianos Perrakis, 2008. "Are Options on Index Futures Profitable for Risk Averse Investors? Empirical Evidence," CoFE Discussion Paper 08-08, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
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