Testing for Stochastic Dominance with Diversification Possibilities
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.
|Keywords||linear programming, portfolio diversification, portfolio evaluation, portfolio selection, stochastic dominance|
|Publisher||Erasmus Research Institute of Management (ERIM)|
Post, G.T.. (2001). Testing for Stochastic Dominance with Diversification Possibilities (No. ERS-2001-38-F&A). Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/121