Testing for central dominance: Method and application
Journal
Journal of Econometrics
Journal Volume
196
Journal Issue
2
Pages
368-378
Date Issued
2017
Author(s)
Abstract
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¡V2013 and results in unambiguous implications for investment decisions. ? 2016 Elsevier B.V.
Subjects
Central dominance
Contact set
Functional inequality
Portfolio selection
Stochastic dominance
SDGs
Other Subjects
Investments; Stochastic systems; Asymptotic distributions; Central dominance; Comparative statics; Empirical studies; Functional inequalities; Investment decisions; Portfolio selection; Stochastic Dominance; Economics
Type
journal article