A Monte Carlo investigation of some tests for stochastic dominance

Authors: Y. K. Tse¹; Xibin Zhang²

Source: Journal of Statistical Computation and Simulation, Volume 74, Number 5, May 2004 , pp. 361-378(18)

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Abstract:

This paper compares the performance of several tests for stochastic dominance up to order three using Monte Carlo methods. The tests considered are the Davidson and Duclos (2000) test, the Anderson test (1996) and the Kaur, Rao and Singh (1994) test. Only unpaired samples of independent observations are considered, as this is a restriction for both the Anderson and Kaur-Rao-Singh tests. We find that the Davidson-Duclos test appears to be the best. The Kaur-Rao-Singh test is overly conservative and does not compare favorably against the Davidson-Duclos and Anderson tests in terms of power.

Keywords: Burr distribution; Income distribution; Monte Carlo method; Portfolio investment; Stochastic dominance; Union-intersection test

Document Type: Research article

DOI: http://dx.doi.org/10.1080/00949650310001593221

Affiliations: 1: School of Economics and Social Sciences Singapore Management University 469 Bukit Timah Road Singapore 259756 2: Department of Econometrics and Business Statistics Monash University Clayton VIC 3800 Australia

Publication date: 2004-05-01