The sizes and powers of some stochastic dominance tests: A Monte Carlo study for correlated and heteroskedastic distributions

Hooi Hooi Lean, Wing Keung WONG*, Xibin Zhang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

34 Citations (Scopus)

Abstract

Testing for stochastic dominance among distributions is an important issue in the study of asset management, income inequality, and market efficiency. This paper conducts Monte Carlo simulations to examine the sizes and powers of several commonly used stochastic dominance tests when the underlying distributions are correlated or heteroskedastic. Our Monte Carlo study shows that the test developed by Davidson and Duclos [R. Davidson, J.Y. Duclos, Statistical inference for stochastic dominance and for the measurement of poverty and inequality, Econometrica 68 (6) (2000) 1435-1464] has better size and power performances than two alternative tests developed by Kaur et al. [A. Kaur, B.L.S.P. Rao, H. Singh, Testing for second order stochastic dominance of two distributions, Econ. Theory 10 (1994) 849-866] and Anderson [G. Anderson, Nonparametric tests of stochastic dominance in income distributions, Econometrica 64 (1996) 1183-1193]. In addition, we find that when the underlying distributions are heteroskedastic, both the size and power of the test developed by Davidson and Duclos [R. Davidson, J.Y. Duclos, Statistical inference for stochastic dominance and for the measurement of poverty and inequality, Econometrica 68 (6) (2000) 1435-1464] are superior to those of the two alternative tests.

Original languageEnglish
Pages (from-to)30-48
Number of pages19
JournalMathematics and Computers in Simulation
Volume79
Issue number1
DOIs
Publication statusPublished - Oct 2008

Scopus Subject Areas

  • Theoretical Computer Science
  • Computer Science(all)
  • Numerical Analysis
  • Modelling and Simulation
  • Applied Mathematics

User-Defined Keywords

  • Correlated distributions
  • Grid points
  • Heteroskedasticity
  • Stochastic dominance

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