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Testing for the stochastic dominance efficiency of a given portfolio

Author

Listed:
  • Oliver Linton

    (Institute for Fiscal Studies and University of Cambridge)

  • Yoon-Jae Whang

    (Institute for Fiscal Studies and SNU)

Abstract
We propose a new statistical test of the stochastic dominance efficiency of a given portfolio over a class of portfolios. We establish its null and alternative asymptotic properties, and define a method for consistently estimating critical values. We present some numerical evidence that our tests work well in moderate sized samples.

Suggested Citation

  • Oliver Linton & Yoon-Jae Whang, 2012. "Testing for the stochastic dominance efficiency of a given portfolio," CeMMAP working papers CWP27/12, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:cemmap:27/12
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    File URL: http://www.cemmap.ac.uk/wps/cwp271212.pdf
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    References listed on IDEAS

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    Cited by:

    1. Arvanitis, Stelios & Scaillet, Olivier & Topaloglou, Nikolas, 2020. "Spanning tests for Markowitz stochastic dominance," Journal of Econometrics, Elsevier, vol. 217(2), pages 291-311.
    2. Sree Vinutha Venkataraman & S. V. D. Nageswara Rao, 2023. "Stochastic dominance algorithms with application to mutual fund performance evaluation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 681-698, January.
    3. Arvanitis, Stelios & Scaillet, Olivier & Topaloglou, Nikolas, 2020. "Spanning analysis of stock market anomalies under prospect stochastic dominance," Working Papers unige:134101, University of Geneva, Geneva School of Economics and Management.
    4. Thierry Post & Valerio Potì, 2017. "Portfolio Analysis Using Stochastic Dominance, Relative Entropy, and Empirical Likelihood," Management Science, INFORMS, vol. 63(1), pages 153-165, January.
    5. Stelios Arvanitis & Mark Hallam & Thierry Post & Nikolas Topaloglou, 2019. "Stochastic Spanning," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(4), pages 573-585, October.
    6. Mehmet Pinar & Thanasis Stengos & Nikolas Topaloglou, 2022. "Stochastic dominance spanning and augmenting the human development index with institutional quality," Annals of Operations Research, Springer, vol. 315(1), pages 341-369, August.
    7. Thierry Post & Iňaki Rodríguez Longarela, 2021. "Risk Arbitrage Opportunities for Stock Index Options," Operations Research, INFORMS, vol. 69(1), pages 100-113, January.
    8. Teng Wah Leo, 2017. "On the asymptotic distribution of (generalized) Lorenz transvariation measures," METRON, Springer;Sapienza Università di Roma, vol. 75(2), pages 195-213, August.
    9. Nguyen, Duc Khuong & Topaloglou, Nikolas & Walther, Thomas, 2020. "Asset Classes and Portfolio Diversification: Evidence from a Stochastic Spanning Approach," MPRA Paper 103870, University Library of Munich, Germany.
    10. Thierry Post & Yi Fang & Miloš Kopa, 2015. "Linear Tests for Decreasing Absolute Risk Aversion Stochastic Dominance," Management Science, INFORMS, vol. 61(7), pages 1615-1629, July.
    11. Post, Thierry & Karabatı, Selçuk & Arvanitis, Stelios, 2019. "Robust optimization of forecast combinations," International Journal of Forecasting, Elsevier, vol. 35(3), pages 910-926.
    12. Mehmet Pinar, 2015. "Measuring world governance: revisiting the institutions hypothesis," Empirical Economics, Springer, vol. 48(2), pages 747-778, March.
    13. Post, Thierry & Karabatı, Selçuk & Arvanitis, Stelios, 2018. "Portfolio optimization based on stochastic dominance and empirical likelihood," Journal of Econometrics, Elsevier, vol. 206(1), pages 167-186.
    14. Giovanni Bernardo & Irene Brunetti & Mehmet Pinar & Thanasis Stengos, 2021. "Measuring the presence of organized crime across Italian provinces: a sensitivity analysis," European Journal of Law and Economics, Springer, vol. 51(1), pages 31-95, February.
    15. Kolokolova, Olga & Le Courtois, Olivier & Xu, Xia, 2022. "Is the index efficient? A worldwide tour with stochastic dominance," Journal of Financial Markets, Elsevier, vol. 59(PB).
    16. Pinar, Mehmet & Stengos, Thanasis & Topaloglou, Nikolas, 2020. "On the construction of a feasible range of multidimensional poverty under benchmark weight uncertainty," European Journal of Operational Research, Elsevier, vol. 281(2), pages 415-427.
    17. Stelios Arvanitis & Thierry Post & Nikolas Topaloglou, 2021. "Stochastic Bounds for Reference Sets in Portfolio Analysis," Management Science, INFORMS, vol. 67(12), pages 7737-7754, December.
    18. Charles Beach, 2023. "Quantile Tool Box Measures for Empirical Analysis and for Testing Distributional Comparisons in Direct Distribution-Free Fashion," Working Paper 1508, Economics Department, Queen's University.
    19. Stelios Arvanitis, 2015. "Saddle-Type Functionals for Continuous Processes with Applications to Tests for Stochastic Spanning," Working Papers 201509, Athens University Of Economics and Business, Department of Economics.
    20. Liesiö, Juuso & Xu, Peng & Kuosmanen, Timo, 2020. "Portfolio diversification based on stochastic dominance under incomplete probability information," European Journal of Operational Research, Elsevier, vol. 286(2), pages 755-768.
    21. Liesiö, Juuso & Kallio, Markku & Argyris, Nikolaos, 2023. "Incomplete risk-preference information in portfolio decision analysis," European Journal of Operational Research, Elsevier, vol. 304(3), pages 1084-1098.

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