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Consistent testing for stochastic dominance: a subsampling approach

  • Oliver Linton

    ()

    (Institute for Fiscal Studies and cemmap and Cambridge)

  • Esfandiar Maasoumi

    (Institute for Fiscal Studies)

  • Yoon-Jae Wang

    (Institute for Fiscal Studies)

We propose a procedure for estimating the critical values of the extended Kolmogorov- Smirnov tests of First and Second Order Stochastic Dominance in the general K-prospect case. We allow for the observations to be serially dependent and, for the rst 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 tests are consistent and powerful against some N1=2 local alternatives. We also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably.

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File URL: http://cemmap.ifs.org.uk/wps/cwp0203.pdf
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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP03/02.

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Length: 42 pp.
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:ifs:cemmap:03/02
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  1. 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.
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  16. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
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  23. 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.
  24. Hanoch, G & Levy, Haim, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Wiley Blackwell, vol. 36(107), pages 335-46, July.
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  28. 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.
  29. 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.
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  33. Anderson, Gordon, 1996. "Nonparametric Tests of Stochastic Dominance in Income Distributions," Econometrica, Econometric Society, vol. 64(5), pages 1183-93, September.
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