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Conditional stochastic dominance tests in dynamic settings

  • Jesús Gonzalo

    ()

  • José Olmo

This paper proposes nonparametric consistent tests of conditional stochastic dominance of arbitrary order in a dynamic setting. The novelty of these tests resides on 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 under the null hypothesis that can be easily approximated by a p-value transformation method. This method has a good finite-sample performance. These tests are applied to determine investment efficiency between US industry portfolios conditional on the performance of the market portfolio. Our analysis suggests that Utilities are the best performing sectors in normal as well as distress episodes of the market.

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File URL: http://e-archivo.uc3m.es/bitstream/10016/9691/1/we1029.pdf
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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1029.

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Date of creation: Oct 2010
Date of revision:
Handle: RePEc:cte:werepe:we1029
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  1. Olivier Scaillet & Nikolas Topaloglou, 2005. "Testing for Stochastic Dominance Efficiency," FAME Research Paper Series rp154, International Center for Financial Asset Management and Engineering.
  2. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, volume 1, number 8355, March.
  3. Miguel A. Delgado & Juan Carlos Escanciano, 2013. "Conditional Stochastic Dominance Testing," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(1), pages 16-28, January.
  4. 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.
  5. Delgado, Miguel A. & Carlos Escanciano, J., 2007. "Nonparametric tests for conditional symmetry in dynamic models," Journal of Econometrics, Elsevier, vol. 141(2), pages 652-682, December.
  6. Garry F. Barrett & Stephen G. Donald, 2003. "Consistent Tests for Stochastic Dominance," Econometrica, Econometric Society, vol. 71(1), pages 71-104, January.
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