Publication: Empirical tests for stochastic dominance optimality
Program
KU-Authors
KU Authors
Co-Authors
N/A
Publication Date
Language
Type
Embargo Status
Journal Title
Journal ISSN
Volume Title
Alternative Title
Abstract
If a given risky prospect is compared with multiple choice alternatives, then a joint test for optimality is more appropriate than a series of pairwise Stochastic Dominance tests. We develop and implement a bootstrap empirical likelihood ratio test for this hypothesis. The test statistic and implied probabilities can be computed by searching over discrete distributions that obey a system of linear inequalities using quasi-Monte Carlo simulation and convex optimization methods. An extension of the Kroll-Levy simulation experiment shows favorable small-sample properties for data sets of realistic dimensions. In an application to Fama-French stock portfolios, pairwise tests classify a portfolio of small growth stocks as admissible, whereas our test classifies the portfolio as significantly non-optimal for every risk averter.
Source
Publisher
Oxford Univ Press
Subject
Business, Finance, Economics
Citation
Has Part
Source
Review of Finance
Book Series Title
Edition
DOI
10.1093/rof/rfw010