Testing for Third-Order Stochastic Dominance with Diversification Possibilities

Post, Thierry

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Testing for Third-Order Stochastic Dominance with Diversification Possibilities

ERIM Report Series Reference No. ERS-2002-02-F&A

18 Pages Posted: 26 Feb 2008

See all articles by Thierry Post

Thierry Post

Graduate School of Business of Nazarbayev University

Date Written: May 2002 2,

Abstract

We derive an empirical test for third-order stochastic dominance that allows fordiversification between choice alternatives. The test can be computed usingstraightforward linear programming. Bootstrapping techniques and asymptoticdistribution theory can approximate the sampling properties of the test results and allowfor statistical inference. Our approach is illustrated using real-life US stock market data.

Keywords: portfolio selection, portfolio evaluation, stochastic dominance, efficiency, linear programming

JEL Classification: M, G3, C19

Suggested Citation: Suggested Citation

Post, Thierry, Testing for Third-Order Stochastic Dominance with Diversification Possibilities (May 2002 2,). ERIM Report Series Reference No. ERS-2002-02-F&A, Available at SSRN: https://ssrn.com/abstract=1097442