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Testing for Stochastic Dominance with Diversification Possibilities

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  • Post, G.T.

Abstract

We derive empirical tests for stochastic dominance that allow for diversification between choice alternatives. The tests can be computed using straightforward linear programming. Bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference. Our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation (as well as other choice problems under uncertainty that involve diversification possibilities). An empirical application for US stock market data illustrates our approach.

Suggested Citation

  • Post, G.T., 2001. "Testing for Stochastic Dominance with Diversification Possibilities," ERIM Report Series Research in Management ERS-2001-38-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  • Handle: RePEc:ems:eureri:121
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    References listed on IDEAS

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    Cited by:

    1. Hildebrandt, Patrick & Knoke, Thomas, 2011. "Investment decisions under uncertainty--A methodological review on forest science studies," Forest Policy and Economics, Elsevier, vol. 13(1), pages 1-15, January.
    2. V.-P. Heikkinen & & Timo Kuosmanen, 2002. "Stochastic Dominance Portfolio Analysis of Forestry Assets," Finance 0210002, University Library of Munich, Germany.

    More about this item

    Keywords

    linear programming; portfolio diversification; portfolio evaluation; portfolio selection; stochastic dominance;

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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