Abstract
The concept of stochastic dominance plays a critical role in many economic and financial studies. However, the classical integer-degree stochastic dominance does not allow for local risk attitudes. In a 2020 paper, Huang, Tzeng and Zhao pro-pose the concept of fractional degree stochastic dominance, which encompasses integer-degree stochastic dominance. They derive the integral conditions for fractional degree stochastic dominance. In this paper we develop the test statistics for fractional degree stochastic dominance based on a reformulation of the integral con-ditions. The test statistics’ asymptotic distributions are obtained and a bootstrap method for determining the critical values of the tests is also introduced. We further explore the stock preferences of the Chinese and US markets to illustrate the appli-cability of the test statistics for fractional degree stochastic dominance developed here.
| Original language | English |
|---|---|
| Pages (from-to) | 89-112 |
| Number of pages | 24 |
| Journal | Journal of Risk |
| Volume | 24 |
| Issue number | 2 |
| Early online date | 14 Dec 2021 |
| Publication status | Published - Dec 2021 |
| Externally published | Yes |
Bibliographical note
Publisher Copyright:© Infopro Digital Limited 2021. All rights reserved.
Funding
This work is supported by grant 2019M661029 from the China Postdoctoral Science Foundation and grants 72071109, 71901123, 71790594 and 11701034 from the National Natural Science Foundation of China.
Keywords
- bootstrap
- fractional degree stochastic dominance
- market efficiency
- risk preference
- test statistics