|Title:||Testing for central dominance: Method and application||Authors:||Chuang, O-Chia
Tzeng, Larry Y.
|Keywords:||Central dominance; Contact set; Functional inequality; Stochastic dominance; Portfolio selection||Issue Date:||2017||Publisher:||ELSEVIER SCIENCE SA||Journal Volume:||196||Journal Issue:||2||Start page/Pages:||368||Source:||JOURNAL OF ECONOMETRICS||Abstract:||
© 2016 Elsevier B.V. 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.
|Appears in Collections:||財務金融學系|
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