Testing for central dominance: Method and application

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• 作者：O-Chia Chuang^a ; ^{occhuang@whu.edu.cn} ; Chung-Ming Kuan^b ; Larry Y. Tzeng^b ; ^c
• 关键词：Central dominance ; Contact set ; Functional inequality ; Stochastic dominance ; Portfolio selection
• 刊名：Journal of Econometrics
• 出版年：2017
• 出版时间：February 2017
• 年：2017
• 卷：196
• 期：2
• 页码：368-378
• 全文大小：746 K
• 卷排序：196

文摘

Central dominance (CD) introduced in Gollier (1995, Journal of Economic Theory) is a risk concept that differs from stochastic dominance (SD) in an important way. In particular, CD implies a deterministic comparative static of a change in decision when risk changes, but SD does not have such an implication. In this paper, we propose the first test of central dominance, which amounts to checking a functional inequality. We derive the asymptotic distribution of a lower bound of the proposed test and suggest a bootstrap procedure to compute the critical values. We also conduct simulations to evaluate the performance of this test. Our empirical study finds clear evidence of CD relations between the S&P 500 index return distributions during 2001–2013 and results in unambiguous implications for investment decisions.