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

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  • John Knight

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  • Stephen Satchell

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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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Suggested Citation

  • John Knight & Stephen Satchell, 2008. "Testing for infinite order stochastic dominance with applications to finance, risk and income inequality," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 32(1), pages 35-46, January.
  • Handle: RePEc:spr:jecfin:v:32:y:2008:i:1:p:35-46
    DOI: 10.1007/s12197-007-9003-5
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    File URL: http://hdl.handle.net/10.1007/s12197-007-9003-5
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    References listed on IDEAS

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    1. Russell Davidson & Jean-Yves Duclos, 1997. "Statistical Inference for the Measurement of the Incidence of Taxes and Transfers," Econometrica, Econometric Society, vol. 65(6), pages 1453-1466, November.
    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. Anthony F. Shorrocks & James E. Foster, 1987. "Transfer Sensitive Inequality Measures," Review of Economic Studies, Oxford University Press, vol. 54(3), pages 485-497.
    4. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-154, January.
    5. 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 915-919, September.
    6. Sen, Amartya, 1997. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198292975.
    7. 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.
    8. Anderson, Gordon, 1996. "Nonparametric Tests of Stochastic Dominance in Income Distributions," Econometrica, Econometric Society, vol. 64(5), pages 1183-1193, September.
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    Cited by:

    1. Gordon Anderson & Teng Wah Leo, 2014. "Ranking Alternative Non-Combinable Prospects: A Stochastic Dominance Based Route to the Second Best Solution," Working Papers tecipa-520, University of Toronto, Department of Economics.

    More about this item

    Keywords

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

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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