Testing for Stochastic Dominance with Diversification Possibilities
November 2001
Research Paper
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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
- stochastic dominance
- portfolio selection
- linear programming
- portfolio diversification
- portfolio evaluation
Classifications using
Journal of Economic Literature (JEL) Classification System
- G3 : Corporate Finance and Governance
- M : Business Administration and Business Economics; Marketing; Accounting
- C44 : Statistical Decision Theory; Operations Research
Automatically Extracted Terms
- portfolio
- utility
- function
- utility function
- &p 500 index
- distribution
- analysis
- return
- index
- approach
- utility functions
- solution
- solution portfolio
- dominance
- problem
- efficiency
- application
- alternative
- x t t
- statistic
