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Consistent testing for stochastic dominance: a subsampling approach

Linton, Oliver, Maasoumi, Esfandiar and Whang, Yoon-Jae (2003) Consistent testing for stochastic dominance: a subsampling approach. Financial Markets Group Discussion Papers (508). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We propose a procedure for estimating the critical values of the extended Kolmogorov- Smirnov tests of Stochastic Dominance of arbitrary order in the general K-prospect case. We allow for the observations to be 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 tests are consistent and powerful against some N −1/2 local alternatives. We also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably. We describe an alternative method for obtaining critical values based on recentering the test statistic and using full sample bootstrap methods. We compare the two methods in theory and in practice.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.ac.uk
Additional Information: © 2003 The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C40 - General
Date Deposited: 06 Aug 2009 11:11
Last Modified: 13 Sep 2024 19:53
URI: http://eprints.lse.ac.uk/id/eprint/24755

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