We derive an empirical test for third-order stochastic dominance that allows for diversification between choice alternatives. The test 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 approach is illustrated using real-life US stock market data.

efficiency, linear programming, portfolio evaluation, portfolio selection, stochastic dominance
Econometric and Statistical Methods: Other (jel C19), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M)
Erasmus Research Institute of Management
hdl.handle.net/1765/164
ERIM Report Series Research in Management
Copyright 2002, G.T. Post, This report in the ERIM Report Series Research in Management is intended as a means to communicate the results of recent research to academic colleagues and other interested parties. All reports are considered as preliminary and subject to possibly major revisions. This applies equally to opinions expressed, theories developed, and data used. Therefore, comments and suggestions are welcome and should be directed to the authors.
Erasmus Research Institute of Management

Post, G.T. (2002). Testing for Third-Order Stochastic Dominance with Diversification Possibilities (No. ERS-2002-02-F&A). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/164