Testing for Second-Order stochastic dominance of two distributions

Kaur, Amarjot ; Prakasa Rao, B. L. S. ; Singh, Harshinder (1994) Testing for Second-Order stochastic dominance of two distributions Econometric Theory, 10 (05). pp. 849-866. ISSN 0266-4666

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Official URL: http://journals.cambridge.org/action/displayAbstra...

Related URL: http://dx.doi.org/10.1017/S0266466600008884

Abstract

A distribution function F is said to stochastically dominate another distribution function G in the second-order sense if ∫x-∞F(u) du ≤ ∫x-∞G(u)du , for all x. Second-order stochastic dominance plays an important role in economics, finance, and accounting. Here a statistical test has been constructed to test H0:∫x-∞F(u) du ≤ ∫x-∞G(u)du , for some x ∈ [a, b], against the hypothesis H1:∫x-∞F(u) du > ∫x-∞G(u)du for all x ∈ [a, b], where a and b are any two real numbers. The test has been shown to be consistent and has an upper bound a on the asymptotic size. The test is expected to have usefulness for comparison of random prospects for risk averters.

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