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Conditional stochastic dominance tests in dynamic settings

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  • Gonzalo, Jesús
  • Olmo, José

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. 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 investment efficiency between US industry portfolios conditional on the dynamics of the market portfolio. The empirical analysis suggests that Telecommunications dominates the other sectoral portfolios under risk aversion.

Suggested Citation

  • Gonzalo, Jesús & Olmo, José, 2013. "Conditional stochastic dominance tests in dynamic settings," UC3M Working papers. Economics we1205, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:we1205
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    Cited by:

    1. E. Agliardi & M. Pinar & T. Stengos, 2014. "Assessing temporal trends and industry contributions to air and water pollution using stochastic dominance," Working Papers wp981, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Agliardi, Elettra & Agliardi, Rossella & Pinar, Mehmet & Stengos, Thanasis & Topaloglou, Nikolas, 2012. "A new country risk index for emerging markets: A stochastic dominance approach," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 741-761.
    3. Olmo, José & Sanso-Navarro, Marcos, 2012. "Forecasting the performance of hedge fund styles," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2351-2365.

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    More about this item

    Keywords

    Hypothesis testing;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • G1 - Financial Economics - - General Financial Markets

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