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The University of Southampton
EconomicsPart of Economic, Social and Political Science

1311 Conditional Stochastic Dominance Tests in Dynamic Settings (J. Gonzalo & J. Olmo)

Author: Jesus Gonzalo (University of Madrid) and Jose Olmo (University of Southampton)

Paper number 1311

This paper proposes nonparametric consistent tests of conditional stochastic dominance of arbitrary order in a dynamic setting. The novelty of these tests lies in the nonparametric manner of incorporating the information set. The test allows for general forms of unknown serial and mutual dependence between random variables, and has an asymptotic distribution that can be easily approximated by simulation. This method has good finite-sample performance. These tests are applied to determine investment efficiency between US industry portfolios conditional on the dynamics of the market portfolio. The empirical analysis suggests that Telecommunications dominates the other sectoral portfolios under risk aversion.

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