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Consistent testing for stochastic dominance : a subsampling approach

  • Oliver Linton
  • Esfandiar Maasoumi
  • Yoon-Jae Whang

We study a very general setting, and propose a procedure for estimating the critical values of the extended Kolmogorov-Smirnov tests of First and Second Order Stochastic Dominance due to McFadden (1989) in the general k-prospect case. We allow for the observations to be generally serially dependent and, for the first time, we can accommodate general dependence amongst the prospects which are to be ranked. Also, the prospects may be the residuals from certain conditional models, opening the way for conditional ranking. We also propose a test of Prospect Stochastic Dominance. Our method is based on subsampling and we show that the resulting data tests are consistent.

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File URL: http://eprints.lse.ac.uk/2207/
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 2207.

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Length: 30 pages
Date of creation: Mar 2002
Date of revision:
Handle: RePEc:ehl:lserod:2207
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  1. Heshmati, Almas & Maasoumi, Esfandiar, 1998. "Stochastic Dominance Amongst Swedish Income Distributions," SSE/EFI Working Paper Series in Economics and Finance 279, Stockholm School of Economics.
  2. Porter, R. Burr & Wart, James R. & Ferguson, Donald L., 1973. "Efficient Algorithms for Conducting Stochastic Dominance Tests on Large Numbers of Portfolios," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(01), pages 71-81, January.
  3. Anderson, Gordon, 1996. "Nonparametric Tests of Stochastic Dominance in Income Distributions," Econometrica, Econometric Society, vol. 64(5), pages 1183-93, September.
  4. Hansen, Bruce E., 1996. "Stochastic Equicontinuity for Unbounded Dependent Heterogeneous Arrays," Econometric Theory, Cambridge University Press, vol. 12(02), pages 347-359, June.
  5. Russell Davidson & Jean-Yves Duclos, 2000. "Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality," Econometrica, Econometric Society, vol. 68(6), pages 1435-1464, November.
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  7. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
  8. Whang, Yoon-Jae, 2001. "Consistent specification testing for conditional moment restrictions," Economics Letters, Elsevier, vol. 71(3), pages 299-306, June.
  9. W. Ogryczak & A. Ruszczynski, 1997. "On Stochastic Dominance and Mean-Semideviation Models," Working Papers ir97043, International Institute for Applied Systems Analysis.
  10. Shorrocks, Anthony F & Foster, James E, 1987. "Transfer Sensitive Inequality Measures," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 485-97, July.
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  12. Y.K. Tse & Xibin Zhang, 2003. "A Monte Carlo Investigation of Some Tests for Stochastic Dominance," Monash Econometrics and Business Statistics Working Papers 7/03, Monash University, Department of Econometrics and Business Statistics.
  13. repec:cup:etheor:v:10:y:1994:i:5:p:849-66 is not listed on IDEAS
  14. 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.
  15. Härdle, Wolfgang & Horowitz, Joel L. & Kreiss, Jens-Peter, 2001. "Bootstrap methods for time series," SFB 373 Discussion Papers 2001,59, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  16. Garry F. Barrett & Stephen G. Donald, 2003. "Consistent Tests for Stochastic Dominance," Econometrica, Econometric Society, vol. 71(1), pages 71-104, January.
  17. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March.
  18. K. -Y. Ho, 2003. "Long-run stock price performance after IPOs: what do tests for stochastic dominance tell us?," Applied Economics Letters, Taylor & Francis Journals, vol. 10(1), pages 15-19.
  19. Abadie A., 2002. "Bootstrap Tests for Distributional Treatment Effects in Instrumental Variable Models," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 284-292, March.
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  21. Daniel L. Millimet & Esfandiar Maasoumi, 2005. "Robust inference concerning recent trends in US environmental quality," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(1), pages 55-77.
  22. Delgado, Miguel A. & Rodriguez-Poo, Juan M. & Wolf, Michael, 2001. "Subsampling inference in cube root asymptotics with an application to Manski's maximum score estimator," Economics Letters, Elsevier, vol. 73(2), pages 241-250, November.
  23. Ian Crawford, 1999. "Nonparametric tests of stochastic dominance in bivariate distributions, with an application to UK data," IFS Working Papers W99/28, Institute for Fiscal Studies.
  24. repec:cup:etheor:v:12:y:1996:i:2:p:347-59 is not listed on IDEAS
  25. Donald W.K. Andrews, 1996. "A Conditional Kolmogorov Test," Cowles Foundation Discussion Papers 1111R, Cowles Foundation for Research in Economics, Yale University.
  26. Gourieroux, Christian & Holly, Alberto & Monfort, Alain, 1982. "Likelihood Ratio Test, Wald Test, and Kuhn-Tucker Test in Linear Models with Inequality Constraints on the Regression Parameters," Econometrica, Econometric Society, vol. 50(1), pages 63-80, January.
  27. Shorrocks, Anthony F, 1983. "Ranking Income Distributions," Economica, London School of Economics and Political Science, vol. 50(197), pages 3-17, February.
  28. Xu, K. & Fisher, G. & Wilson, D., 1995. "New Distribution Tests for Stochastic Dominance," Department of Economics at Dalhousie University working papers archive 95-02, Dalhousie, Department of Economics.
  29. Bishop, John A & Formby, John P & Thistle, Paul D, 1992. "Convergence of the South and Non-South Income Distributions, 1969-1979," American Economic Review, American Economic Association, vol. 82(1), pages 262-72, March.
  30. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
  31. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  32. Levy, Haim & Wiener, Zvi, 1998. "Stochastic Dominance and Prospect Dominance with Subjective Weighting Functions," Journal of Risk and Uncertainty, Springer, vol. 16(2), pages 147-63, May-June.
  33. Peter Reinhard Hansen, 2001. "An Unbiased and Powerful Test for Superior Predictive Ability," Working Papers 2001-06, Brown University, Department of Economics.
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